May 27, 2015

Study: NM tax code counteracts some inequality efforts

Print

A working paper that examined state tax codes and their effects on income inequality found that New Mexico, along many other states, has a tax system that tends to work against federal efforts to mitigate or reduce income inequality.

Money flying_sidewaysThe study comes from three staff economists with the Federal Reserve and looked at whether tax systems in each state helped the federal tax system to mitigate income inequality or if the state tax systems countered these efforts.

The federal tax system tends to lessen inequality since it has a progressive tax system based largely on income taxes. States generally rely on sales taxes which are more regressive; New Mexico relies heavily on a Gross Receipts Tax.

New Mexico’s GRT is known as a regressive tax that is a relic from the 1960s, when the state sought to tax activity from the federal government, which had a very large presence in the state but could not be directly taxed.

The study examined data from 1984 to 2011, so tax changes that occurred since then have not been included. New Mexico passed a major tax package at the very end of the 2013 session.

“In a few states, such as Minnesota, Oregon, and Wisconsin, state taxes compress the income distribution about one-sixth as much as federal taxes do,” the study says. “In contrast, the tax systems in a handful of states, including Mississippi, Tennessee, and West Virginia, widen the income distribution sufficiently to reverse around one-third of the compression achieved by the federal tax code.”

In other words, Minnesota, Oregon and Wisconsin work to further federal efforts to reduce income inequality, while Mississippi, Tennessee and West Virginia go even further in the opposite direction.

New Mexico falls closer to the middle of the pack on the issue, though it still has a system that does not aid federal efforts in reducing income inequality.

The Washington Post focused on states, like New Mexico, that “actually undermine the federal government’s anti-inequality measures.”

“In essence, they take from the poor and give that money to the rich,” the Washington Post article said.

In all, the paper found that New Mexico’s tax system reduced federal efforts to mitigate income inequality by 4.4 percent.

Among the states that neighbor New Mexico, only two built upon the federal government’s inequality-reducing efforts through the tax code, Colorado and Utah. Both states did so by 7.4 percent. On the other end of the spectrum, Texas’ tax code undermined the federal tax code’s inequality-reducing efforts by 14.8 percent.

The Wall Street Journal explained the paper’s parameters.

The research, based on data from 1984 to 2011, looks at the effect of taxes on the distance between the incomes of those at the 10th percentile (those whose incomes are below 90% of the population) and the 90th percentile (those whose incomes are above 90% of the population). It doesn’t consider the impact of taxes on the very rich, the top 1%.

The working paper explained that data on the top 1 percent of the population was difficult to calculate accurately, which is why they were not included.

“Our inability to measure top incomes is an important limitation because a significant portion of the rise in inequality in recent years is due to rapid gains at the extreme top of the distribution,” the paper says.

Elderly households were also not included.

“We exclude elderly households because we are focusing on tax policy, not on transfers targeted at the elderly such as Social Security,” the paper explains.

Comments

comments