Tax Analysts Blog

Good -- and Not so Good -- Corporate Tax Ideas from New Mexico

Posted on Jan 9, 2013

New Mexico Governor Susana Martinez, a rising star among GOP politicians, is calling for a steep reduction in the corporate tax rate. She proposes cutting the rate from 7.6 to 4.9 percent. That is good news. The corporate income tax is -- and will likely remain -- one of the worst ways to raise revenue for state governments. The tax is inefficient, ineffective, and distorts economic decision making. It would be better if Governor Martinez called for the repeal of the tax, but whittling it down is okay as well. States with no or low corporate income taxes are better able to attract and retain multistate and multinational businesses. If you do not believe that, explain why states with high corporate income taxes trip over themselves to provide tax incentives to companies promising to come or stay.

But Martinez is also calling for corporations to have the option of using either the current three factor formula or a single sales factor formula to calculate their tax liabilities. The three factor formula imposes taxes based on a company's property, payroll, and sales in the state. The single sales factor formula imposes the tax based solely on a company's sales in the state. Giving companies an option makes the corporate income tax almost voluntary. Out of state companies that only sell into the state will choose the three factor formula. In state companies that sell all or most of their products out of state will choose the single sales tax formula. Companies will rationally choose the method that lowers their tax liabilities. So what is the point of having the tax? No matter what you think of the corporate income tax, optional filing is bad tax policy.

Again, it would be better to simply repeal the tax. In New Mexico, the tax only raised $229 million in 2011. Once phased in, the rate cuts and filing option will cost $225 million. So there is not going to be a lot of tax revenue to distribute anyway.

Read Comments (4)

CPA ReaderJan 8, 2013

This is one of the best tax proposals a governor has ever suggested. The
either-or strategy is an encouragement to companies that love New Mexico (such
as due to great local workforce, affordable land, and appealing
scenery/lifestyle) so they might not relocate to neighboring states. Selecting
either the 3-factor or single sales factor formula is reasonable,
understandable to laymen, and not cumbersome to administer like too many other
SALT proposals. Kudos.

A.G. KalmanJan 8, 2013

$229M represents 4.6% of the total tax revenues for N.M. 17.7% of all income
taxes. The budget deficit was $450M. $229M may seem small potatoes to you but
it is not an insignificant amount to a state that only has a working population
around 900K.

West Coast OffenseJan 9, 2013

"The tax is inefficient, ineffective, and distorts economic decision making."
Would that not be equally true of the corporate tax at the federal level? What
are you suggesting: Should every business receive S-corp treatment?

Peter MillerJan 10, 2013

I see a political answer to David's question: Governor Martinez and her GOP
compatriots aspire to propel her to prominence in national politics. The GOP
sees potential for her as a future presidential or vice presidential candidate.
If this happens, her advancement of corporate tax repeal in New Mexico will be
red meat for the other side. She would surely be accused of being too cozy with
those big, bad, greedy corporate fat cats.

Better for her all the way around to strike a balance: Martinez can play both
sides of the street with her proposal - She can claim that her proposed
measures will attract business activity and drive employment, improving the
state's economy... and at the same time, she can claim that corporations need
to pay their "fair share" of taxes.

Is this the most efficient way to collect a relatively small portion of the
state's revenue? Probably not. But is it the most expedient way to generate
goodwill and make political points with as many people as possible? Yes!
Absolutely.

Pretty smart move, all the way around...

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