It is time to repeal New Mexico’s counterproductive tax on Social Security benefits.
For more than half a century after Social Security was enacted in 1935, those benefits were not taxed in New Mexico.
In 1990, the New Mexico legislature passed a complex bill changing the way state and federal pensions were taxed, and raising more than $13 million for state government.
On the second-to-last page was a single line that imposed the state’s income tax on Social Security benefits. This provision received no public scrutiny.
Today, New Mexico is one of 13 states that tax Social Security benefits, and New Mexico has the second-harshest tax, costing the average Social Security recipient Mexico nearly $700 a year.
Taxing Social Security benefits undermines the purpose of the Social Security Act, which was designed to lift seniors out of poverty. New Mexico ranks third-highest in the nation for the percentage of seniors living in poverty.
Social Security is the sole source of income for one in three New Mexico seniors, yet the average benefit is only about $13,900 a year. The average annual cost of food, housing and health care for older Americans is nearly twice as high: about $28,000, according to the U.S. Department of Labor.
If seniors could keep the money they pay in taxes on Social Security benefits, much of it would be spent immediately and go back into New Mexico’s economy. State government would still receive significant revenues through gross receipts taxes generated by that economic activity.
One reason why most states do not tax Social Security benefits is to attract and retain retired people as an economic development tool.
The state’s tax on Social Security benefits is also double taxation. When New Mexicans receive their paychecks, the money taken out for Social Security is already subject to state income taxes.
Legislators and Gov. Michelle Lujan Grisham could repeal New Mexico’s tax on Social Security benefits without offsetting revenues, since taxes were raised last year on automobiles and internet sales, among other things. This would decrease state tax revenues by about $73 million a year, according to an analysis by the state’s Legislative Finance Committee.
Another option would be the model enacted by West Virginia and North Dakota. Those states targeted their tax exemptions to lower- and middle-income residents by repealing taxes on Social Security benefits for married taxpayers with incomes of less than $100,000 and for all other taxpayers with incomes of less than $50,000.
A similar reform in New Mexico would reduce state tax revenues by $21 million to $29 million, about one-third of 1 percent of the $7 billion state government budget.
Legislators from both sides of the aisle have introduced bills in recent years to repeal or reduce New Mexico’s tax on Social Security benefits, including Reps. Gail Armstrong (R-Socorro), Daymon Ely (D-Albuquerque) and Patricia Roybal Caballero (D-Albuquerque).
We hope you will urge your legislators and Gov. Lujan Grisham to support legislation repealing the tax on Social Security. You can learn more and email them from Think New Mexico’s website, thinknewmexico.org.
(Fred Nathan is executive director and Kristina G. Fisher is associate director of Think New Mexico, an independent, nonpartisan, results-oriented think tank.)