Feb 11, 2015

In Fiscal Year (FY) 2016, New Mexico collected $8.2 billion in state and local taxes—or $3,915 for every man, woman, and child. 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?

To better answer this question, this analysis will calculate New Mexico’s Tax Burden relative to the private sector. Ultimately, it is the private sector that creates new wealth and income. A high tax burden means a state is hobbling its private sector relative to other states and reducing their long-run economic growth potential.

Click here to view tax burden data by state, type of tax, and for years 1950 to 2016

Unfortunately for taxpayers, as shown in Chart 1, New Mexico’s state and local tax burden (tax collections divided by private sector personal income) was the sixth highest in the nation for FY 2016 at 17.6 percent—or 24 percent above the national average of 14.3 percent.

#NewMexico state and local #taxburden in FY 2016 was the 6th highest in the nation at 17.6%— 24% above US average of 14.3% http://bit.ly/2FX9C8F @keypolicydata #NMpol #NMecon #NMleg #NMgov #PolicyData (click to tweet)

As shown in Chart 2, New Mexico’s tax burden has increased over time by 54 percent to 17.6 percent in FY 2016 from 11.4 percent in FY 1950.

#NewMexico state and local #taxburden has increased 54% between FY 1950 (11.4%) to 2016 (17.6%) http://bit.ly/2FX9C8F @keypolicydata #NMpol #NMecon #NMleg #NMgov #PolicyData (click to tweet)

Click here to view tax burden data by state, type of tax, and for years 1950 to 2016

To put New Mexico’s tax burden into perspective, let’s compare it to size of major industries in the state (as a percent of private sector income). As shown in Chart 3, New Mexico’s 17.6 percent tax burden is greater than these combined industries: retail trade (7.8 percent), construction (6.8 percent), utilities (1.1 percent), and arts, entertainment, and recreation (0.9 percent).

#NewMexico state and local #taxburden > combined industries: retail, construction, utilities, and arts/entertainment http://bit.ly/2FX9C8F @keypolicydata #NMpol #NMecon #NMleg #NMgov #PolicyData (click to tweet)

New Mexico’s tax burden by type is one of extremes. One the positive side New Mexico has a low property tax burden (3.5 percent, 14th lowest) and individual income tax burden (3 percent, 18th lowest). However, New Mexico has a very high sales tax burden (6.7 percent, 2nd highest), and all other taxes burden (3.9 percent, 7th highest).

New Mexico’s sales tax is actually a gross receipts tax meaning that it is levied on a very broad-based number of goods and services and that 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.

New Mexico does need to ditch the gross receipts tax, but at the same time increasing other taxes is not the answer either. The solution is to adopt a Business Flat Tax like the one I’ve proposed for New Hampshire (pdf).

Additionally, New Mexico allows their localities to levy an additional percentage over the state rate of 5.125 percent in 2017. According to the Tax Foundation, as of January 1, 2017, the combined state and local sales tax rate for New Mexico averages to 7.63 percent which is the 15th 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. According to the New Mexico State Investment Council website:

“The Severance Tax Permanent Fund (STPF) was created by the New Mexico Legislature in 1973, as a way to save and invest the severance taxes not being used that year to bond capital projects.  The taxes originate from oil, gas and other natural resources as they were taken (severed) from the state.”

“Voters later approved constitutional protections for the STPF against legislative appropriation from the corpus of the fund, which coupled with investment returns, allowed the fund to grow.  The STPF annually distributes 4.7% of its 5-year average, or about $200 million per year to the state’s general fund.”

“Combined distributions from the Permanent Funds essentially deliver, on average, about $1000 in value annually for every household in New Mexico.  Without the distributions produced by these Funds every year, New Mexicans would face much higher taxes, a significant reduction in government services, or both.”

High severance taxes also pose another quandary in that they are generally considered by economist to be passed onto the consumer in the form of higher prices. As a result, much of the severance tax burden can be “exported” to the other 49 states. The tax burden analysis published by the Tax Foundation performs adjustments for this impact and ranks New Mexico as the 37th highest in the country with a tax burden of 8.7 percent of income in 2012.

While “tax exporting” is an important economic consideration, policymakers need to be aware of the size of tax collections relative to the private sector economy. Tax exporting may mean lower tax burdens in the short-run, tax exporting is not a costless transaction as it creates distortions the economy in the long-run. As such, tax burdens estimates shown here at Key Policy Data and those published by the Tax Foundation are both useful to policymakers.

Of course, the tax burdens for local government can vary just as much as they do among the 50 states. As such, we have also calculated the local government tax burden for every County in New Mexico—this includes every taxing jurisdiction within the geographic county borders whether it is a city, a special district, or county government itself.

New Mexico has 33 counties and are sorted by local government tax burden (highest to lowest) below:

• Harding County, NM (20.3 percent)
• Guadalupe County, NM (11.0 percent)
• Hidalgo County, NM (10.9 percent)
• Lea County, NM (10.2 percent)
• McKinley County, NM (9.7 percent)
• San Miguel County, NM (9.7 percent)
• Colfax County, NM (9.6 percent)
• Rio Arriba County, NM (9.3 percent)
• Luna County, NM (8.5 percent)
• Lincoln County, NM (8.4 percent)
• Sierra County, NM (8.2 percent)
• Union County, NM (8.0 percent)
• Taos County, NM (7.7 percent)
• De Baca County, NM (7.5 percent)
• Torrance County, NM (7.5 percent)
• Grant County, NM (7.3 percent)
• Quay County, NM (7.1 percent)
• Dona Ana County, NM (6.4 percent)
• Eddy County, NM (6.2 percent)
• Bernalillo County, NM (6.0 percent)
• Los Alamos County, NM (5.7 percent)
• Curry County, NM (5.3 percent)
• San Juan County, NM (5.1 percent)
• Catron County, NM (5.1 percent)
• Socorro County, NM (4.9 percent)
• Otero County, NM (4.7 percent)
• Cibola County, NM (4.6 percent)
• Valencia County, NM (4.6 percent)
• Santa Fe County, NM (4.3 percent)
• Roosevelt County, NM (4.1 percent)
• Sandoval County, NM (3.9 percent)
• Chaves County, NM (3.4 percent)
• Mora County, NM (2.4 percent)

Click here to view tax burden data by state, type of tax, and for years 1950 to 2016

Finally, don’t forget to watch our exclusive time-lapse video of state and local tax burdens over the last 66 years! See if your state has been above or below the national average?