In Fiscal Year (FY) 2011, New Mexico collected $7.2 billion in state and local taxes. While this is an impressive sum of money, it tells us little about whether or not the average New Mexico taxpayer can afford this level of taxation.
As shown in the charts below, New Mexico’s state and local tax burden (tax collections divided by personal income) was the eighteenth highest in the nation for FY 2011 at 10.3 percent—or 1.5 percent below the national average of 10.5 percent. New Mexico’s tax burden has grown a modest 18.3 percent to 10.3 percent in FY 2011 from 8.7 percent in FY 1950.
New Mexico’s tax burden by type is one of extremes. One the positive side New Mexico has a low property tax burden (1.9 percent, 47th highest), individual income tax burden (1.6 percent, 37th highest), and corporate income tax burden (0.33 percent, 24th highest). However, New Mexico has a very high sales tax burden (4 percent, 3rd highest), and all other taxes burden (2.5 percent, 9th highest).
New Mexico’s sales tax is actually a gross receipts tax meaning that it is levied on very broad-based number of goods and services and leads to tax pyramiding. Tax pyramiding creates all kinds of very bad economic distortions (pdf) by imposing higher effective tax burdens on some industries, but not others—especially industries that are near the end of the value-added chain.
Additionally, New Mexico allows their localities to levy an additional percentage over the state rate of 5.125 percent in 2013. According to the Tax Foundation, the combined state and local sales tax rate for New Mexico averages to 7.26 percent which is the 16th highest in the country.
Finally, New Mexico’s high all other taxes burden is due to the Severance Tax Permanent Fund which levies a 12.5 percent tax on coal, natural gas, oil, and other minerals. The Fund has disbursed more than $8.5 billion since its creation in 1973 and accounts for nearly 15 percent of the state’s budget.
Interestingly, New Mexico’s Fund works opposite to Alaska’s, which pays directly to individuals, and creates an apples-to-oranges comparison. Since New Mexico’s Fund pays directly to the state, it acts as a tax reduction since, all else being equal, other taxes are lower than otherwise. Alaska’s Fund, however, goes to individuals so it is not directly counted as a tax reduction because it does not impact tax collections.
The easiest way to deal with the problem is to “export” severance taxes to other states thus reducing the tax burden on New Mexico taxpayers—the Tax Foundation does this and shows a much lower tax burden of 8.4 percent.
Note: FY 2012 state and local tax data from the U.S. Census Bureau will not be available until later in 2014 because FY 2012 is part of their comprehensive “Census of Governments” that is done every 5 years (on years ending 2 and 7). Rest assured that Key Policy Data will post the FY 2012 as soon as it becomes available.
J. Scott Moody has nearly 20 years experience as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as the American Conservative Union Foundation, Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.