Let’s start with the good news: New Mexico is number one on an important ranking. We have the nation’s lowest property taxes, and they’ve been the lowest for a long time. The reason goes back in history to the 1800s, when New Mexicans lost land to tax sales because they didn’t understand American taxation imposed on them, and the territory was infested with unscrupulous lawyers. Today property tax rates reflect the reality that in New Mexico many people are land rich and cash poor.
Other components in the Tax Foundation’s 2024 State Business Tax Climate Index are mixed. When this year’s numbers came out, we hardly noticed because nobody could make political hay from it. Our overall ranking was 23rd. Not great but not horrible. The Tax Foundation called it “a respectable ranking.”
It hurts a bit because neighboring states did better: Utah, 8th; Texas, 13th; Arizona, 14th; and Oklahoma, 19th. However, Colorado was 27th. The top five states in the overall ranking were Wyoming, South Dakota, Alaska, Florida and Montana. The worst (50th) was New Jersey, followed by New York, California, Connecticut and Massachusetts.
Breaking Down the Rankings
The foundation ranks tax systems as of July 1, 2023. If we pry our ranking apart, we also learn that we rank 11th for unemployment insurance taxes and 13th for corporate taxes. On the downside, New Mexico ranks 35th in sales taxes and 36th in individual taxes. Those two factors pull us down in overall rankings.
New Mexico’s gross receipts tax hits both goods and services, so it directly affects the cost of doing business. Businesses here have complained forever, and, except for a few half-hearted stabs at reform, it’s still with us and still climbing. Surprisingly, there are states where sales taxes are worse, such as Arizona, Colorado, Oklahoma and Texas. If you’re driving across the state line to shop in these states, you’re hurting yourself and New Mexico.
Individual income taxes weigh heavily in the foundation’s measures, so states like Wyoming, South Dakota, Alaska and Florida, which have no individual income taxes, smell like roses. The foundation argues that individual tax codes can discourage people from becoming self-employed, and individual income taxes can also raise the cost of labor.
Arizona is ninth in this category after moving from a two-bracket, graduated rate system to a flat tax rate of 2.5 percent, joining 10 other states with a flat rate. Colorado reduced its flat rate to 4.4 percent. New Mexico plunged from 26th in 2021 to 36th in 2022, and there it remains.
What does that mean? The Tax Foundation likes the numbers in Wyoming and South Dakota, but do you really want to live there?
Last year, bloggers at the nonpartisan Institute on Taxation and Economic Policy compared top-ranked Wyoming with bottom-ranked New Jersey.
“On nearly every economic measure, from number of Fortune 500 companies to overall economic output to entrepreneurship, New Jersey outperforms Wyoming – and by a long shot,” they wrote. “That’s because New Jersey has top-notch public schools, robust transportation infrastructure and other public goods – all made possible by the revenues raised by the very taxes that land it in the bottom spot of the Tax Foundation’s Index.”
The same number crunchers faulted the Tax Foundation’s tilt toward lower or no taxation, “even though state and local taxes make up a vanishingly small fraction of total business costs, and the services paid for with those tax dollars are crucial to the success of every business.”
Still, we can’t ignore the Tax Foundation. Site Selection Group considers the annual report a valuable tool in judging states. But it’s one of many considerations, which include workforce, infrastructure, education, business friendliness and cost of doing business.
This election cycle, candidates may rail about New Mexico’s taxes. Yes, it’s important, but it’s not the only factor in growing the state’s economy.
