The tax pyramid, not the SS benefit tax, is the problem
Proponents of exempting Social Security benefits from New Mexico income tax argue that the tax constitutes double taxation, that the benefits accrue to the beneficiaries who in return receive their own money which has already been imposed. This claim is largely false.
The Federal Social Security Trust Fund, which is essentially an accounting device within the Federal Treasury, is credited with funds from several sources and pays benefits from these sources. The four main sources are employee contributions, employer contributions, and interest earned on each of these contributions for the period between receipt and payment of benefits. Of these four sources, only employee contributions were taxed. The employer gets a tax deduction for their contributions and, of course, no one is taxed on the interest earned by the government.
The trust fund also regularly receives an annual transfer from the federal treasury equal to the amount of tax paid on social security benefits by current beneficiaries. Interest also accrues on these funds. This transfer is essentially a grant to the Social Security Trust Fund from the general funds of the Treasury.
In addition, since the sum of these amounts above is insufficient to support the level of benefits paid, Congress will occasionally act to support the fund by raising taxes on future taxpayers or making direct transfers into the fund. All of these amounts bear interest and are available to pay current beneficiaries. These beneficiaries have neither contributed nor taxed them.
Finally, long-term Social Security recipients also benefit from winning a sort of longevity lottery. Their benefits are partly financed by contributions paid by or on behalf of workers and other beneficiaries who die prematurely. Of course, the surviving Social Security beneficiaries did not contribute or tax on these amounts.
In total, it seems likely that about 75% to 85% of the amounts of social security benefits paid to the average recipient come from funds on which that recipient was not originally taxed. This is in line with the existing legal provision that no beneficiary is taxed on more than 85% of social security benefits received.
Although the taxation of Social Security benefits is not an example of double taxation, New Mexico imposes a clear example of double taxation that harms both New Mexico businesses and consumers. The Gross Receipts Tax “pyramid” occurs when businesses must pay gross receipts tax on goods or services needed to produce their final product, and then that tax is incorporated into the final price charged. to the consumer, all of which is then subject to gross receipts tax.
Recently, the legislature partially eliminated tax pyramiding of gross receipts, but significant pyramiding remains. If the legislator is concerned about double taxation, pyramiding is a more appropriate target than social security benefits.