Everybody loves to get something for nothing. But let’s say you went to Blake’s yesterday and bought a Lotaburger. Then let’s say you went back today and ordered a Lotacombo, which includes a Lotaburger, fries and a Coke. But when it came time to pay, you deducted the price of the Lotaburger from your bill, explaining that you didn’t need to pay for it again because you’d already paid for a Lotaburger yesterday. You might receive some choice words, but you would not get your food.
Now let’s say you went to the office where they collect state income taxes, and you told them that you didn’t need to pay all of your state income taxes this year because you already paid them last year and you’d deducted that amount from this year’s bill. They would laugh you out of the office, right?
Wrong. As long as you itemized on your federal income tax form, you get to deduct the state and local taxes you paid last year from the income you’ll pay state taxes on this year. You can also deduct last year's state and local taxes from this year's federally taxed income.
It’s a pretty neat trick, kind of like getting a reward for doing something that everyone else must do—though not everyone else gets the reward for doing it.
What the rich folks don’t pay, the rest of us make up for—either by paying higher taxes ourselves or by doing with fewer services.
Most New Mexicans, about 75 percent, don’t qualify for this reward because they don’t itemize on their federal tax return. Itemizing is a way to get a larger tax deduction than the standard deduction that most of us take.
Chances are, if you own a home you’ve tried to increase your deduction by itemizing because you know that you can include the interest you’ve paid on your mortgage on Schedule A—the form for itemizing. You threw in your charitable contributions and the state income taxes you paid last year, but after you did the math, you ended up taking the standard deduction anyway because it was bigger.
In fact, itemizing pays off for only 25 percent of New Mexico taxpayers. Generally, they are the folks making the most money.
Most other states require their wealthiest residents to add the state and local tax deduction back into their income when they fill out their state tax form. New Mexico is one of just seven states that do not.
The upshot of this deduction is that New Mexico lets its richest residents keep a whopping $90 million every year. What the rich folks don’t pay, the rest of us make up for—either by paying higher taxes ourselves or by doing with fewer services.
This tax deduction isn’t the only tax perk that those in the upper income brackets enjoy, courtesy of our fine state. In recent years, their income tax rate was cut in half. They’re also allowed one of the most generous deductions on capital gains income in the nation.
Legislation that would have disallowed past state tax payments to be deducted from current state tax payments was floated in the just-finished legislative session. Despite the fact that the state is facing a historic revenue deficit, this commonsense bill failed. So did other legislation that would have asked the wealthiest New Mexicans to chip in a bit more during these tough economic times.
Apparently, there are those in the state Senate who would rather see average New Mexicans pay a tax on flour tortillas than see the wealthy give up their special tax breaks.
Most tax deductions serve some purpose—usually to encourage economic development or to level the playing field for those who are at a disadvantage. In other words, there is always some relatively logical reason for every exception to the tax law. For example, a company might get a tax break as an incentive to create jobs. But allowing taxpayers to deduct their old tax payment from their new tax payment does not serve the common good.
So, while everybody loves to get something for nothing, in this case, a few people get something—a special tax deduction—but the rest of us get absolutely nothing. The rest of us always have to pay for our Lotaburgers.
The opinions expressed are solely those of the author.