(The Center Square) – While New Mexico has stopped taxing Social Security benefits for most taxpayers, the state still needs more tax reforms to improve its economic climate, according to some fiscal policy experts.
The state stopped last month stopped taxing Social Security benefits for those who earn $100,000 or less each year, which means wealthier residents will take on a slightly higher share of funding state governments and public schools in the state, the Associated Press (AP) reported.
The change in Social Security taxation will cause a $94 million drop in revenue in the fiscal year that started July 1, the AP reported, citing estimates from the state legislature’s Budget and Accountability Office. The reforms also provided an exemption for military pensions and new child tax credits.
“The tax burden borne by the top 5% increased slightly, while the burden borne by the other 95% dropped significantly,” the Office of the Legislative Finance Committee said in a newsletter, according to the AP.
The Tax Foundation is generally opposed to changes that narrow the tax base, Tim Vermeer, a senior policy analyst specializing in state tax policy or the group, told The Center Square.
“We would prefer that income be taxed broadly, income pension included,” he said. “But there are so many states that exempt Social Security income that there isn’t a huge fight about that from us.”
Social Security is somewhat different from other sources of income in that it was originally a sort of tax paid by the recipient, Vermeer noted.
“It’s a special case,” he said. “You are being taxed initially and then you are getting it distributed back to you later,” he said.
New Mexico’s exemption for those earning $100,000 or less means that the exemption is broad-based, Vermeer added.
“Most Social Security recipients are probably included in that,” he said.
Exempting Social Security and military pensions from state taxation were “long overdue,” Paul Gessing, president of the Rio Grande Foundation, told The Center Square.
The state does not have a sales tax but rather uses a gross receipts tax on businesses.
“Although the gross receipts tax is imposed on businesses, it is common for a business to pass the gross receipts tax on to the purchaser either by separately stating it on the invoice or by combining the tax with the selling price,” the state says on its website.
According to Gessing, New Mexico is over-reliant on the gross receipts tax, which he called “regressive.” The larger problem is the state’s “feeble economy,” he said.
He called New Mexico “one of America’s poorest states and a blue state slow-growth outpost in the American Southwest.”
The state has experienced the highest unemployment rate in the nation for the last seven months, Gessing said.
But New Mexico’s strong point is its oil and natural gas industry, he said.
“New Mexico has a real opportunity due to the ongoing boom in its oil and gas industries which have generated an unprecedented budget windfall and opportunities for reducing taxes,” he said. “If New Mexico policymakers are serious about improving the state’s feeble non-oil economy, policymakers need to more aggressively address the gross receipts and income taxes in ways that will improve New Mexico’s poor business climate.”
