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Incentives help competitiveness

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By Harold Morgan

The recent talk of taxes in these columns has been an introduction to reviewing a study of what New Mexico’s taxes do to new investment.

Driven initially by Albuquerque Mayor Richard Berry, who recruited all sorts of help, the study is “New Mexico Business Tax Competitiveness and Simulations of Selected Tax Policy Changes.” Find it at the New Mexico Tax Research Institute, www.nmtri.org. The Ernst & Young accounting and consulting firm did the work.

The E&Y New Mexico report added specifics to a 50-state E&Y look at effective tax rates on business. A reference point was a 1997 study done by a unit of KPMG Peat Marwick comparing tax rates and incentives among New Mexico and eight other states. E&Y used the same states for comparison.

In a negative sense, New Mexico’s tax standing has “improved” since 1997 when we could claim only the third highest tax burden among the nine states. Now we are first. (No, the study factors were not quite equal. I’m ignoring that.) 

New Mexico’s business tax burden leads all states. Oregon, one of the eight states compared to New Mexico in the incentives analysis, has the nation’s second lowest business tax burden.

Both studies brought New Mexico’s rank to the middle of the nine after application of tax incentives. 

Doing what was necessary, E&Y made assumptions about the type and size of business—a $100 million investment—for which to consider the tax rates of all 50 states. For New Mexico, potential tax changes were applied to the business. “Modeling” is the term for this exercise. With modeling, one leaves out a lot. Complex modeling of the type done by Santa Fe Institute researchers still leaves out a lot. 

Deming was added to the New Mexico analysis to get an idea of what might happen in rural communities. Adding Deming also stretches the concept. 

The study considered nine business areas. Four were headquarters, research and development, business support services, and management, scientific and technical consulting services. 

There were five manufacturing areas: renewable energy equipment, food products, computers and electronics, electrical equipment and aerospace products and parts. 

The idea of a company spending $100 million locating its headquarters in Deming, well, that’s far out, man. Such conceptual heroics come with the territory. 

It is, however, reasonable to think a business might spend $100 million or more to locate in rural New Mexico. For Deming, while I don’t know the size of Border Foods, I do know the company is of some size.

Mines are expensive, though not considered by E&Y. Themac Resources Group of Vancouver, B.C., plans to spend more than $200 million reopening the Copper Flat Mine near Hillsboro. 

In the sense of reducing the effective tax rate, New Mexico’s incentives work. E&Y incorporated the heavily used High Wage Jobs Tax Credit, which the rate reduction, plus the Investment Tax Credit, the Technology Jobs Tax Credit, and Industrial Revenue Bonds.

The Job Training Incentive Program, long a key economic development tool in New Mexico, was not part of E&Y’s analysis.

Applying the incentives brought our tax rate, overall, into the lower middle range—sixth place—among the nine states when considering all nine industries. That average obscured variation, as averaging does.

The good news is that incentives move the tax rate to the lowest among the nine states for some activities done especially well in New Mexico. 

They are research and development; management, scientific and technical consulting; and making aerospace products and parts. Rates stayed the highest for making food products, renewable energy equipment and electrical equipment.

The bad news is that our system remains complex and little inclination to change appears in the Legislature. 

Harold Morgan

New Mexico News 

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