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New Mexico faces rapidly-changing economic and political realities. The situation provides both peril and opportunities for New Mexicans, but there will be a transitional period and it may not be easy.

The political changes are two-fold and both of them will reduce the flow of federal money that has long propped up New Mexico’s economy. The simplest and most obvious change involves our massive loss of Congressional seniority. As recently as 2009, the state’s US Senators held the top two slots on the Energy Committee. Come January 2013, New Mexico won’t have either seat.

The National Labs rely directly on the Energy Committee and the simple loss of seniority will inevitably make New Mexico more vulnerable to budget cuts.

The topic of budget cuts leads me naturally to the fact that our state has benefitted from a decade of rapid growth in federal spending, much of it focused on the defense industry. As John Fleck pointed out in the Journal recently, New Mexico receives $3.35 for every $1 we pay in taxes.

Way back in 2000, President Clinton’s last budget came to $1.8 trillion. Obama’s 2011 budget was $3.8 trillion. That is more than double the spending in just over 10 years. Debate over how and when to put the federal government on a more sustainable path has been the central point in numerous recent debates in Washington, DC. To say that this rate of growth is unsustainable would be an understatement.

New Mexico must adjust to this new reality by generating growth from within, relying on the private sector and entrepreneurs, not Washington, for jobs and economic growth. The good news is that, for all of his flaws and wasteful spending, Gov. Richardson started us down the right path with his 2003 income and capital gains tax cuts. New Mexico’s top income tax rate dropped from 8.2 percent to 4.9 percent and the capital gains tax rate was reduced by 50 percent.

The economy responded and, according to the Rich States, Poor States report from the American Legislative Exchange Council (ALEC), New Mexico had the 5th best economic performance in the nation from 1999-2009. Unfortunately, we can’t rest on our laurels and the past decade of relative growth. According to the same report, New Mexico’s economic outlook is only 39th in the nation.

According to this report, states that have the brightest economic outlooks, including western states like Utah (1), Wyoming (4), Idaho (5), and Colorado (6), have reasonable or zero taxes on productive economic activity (like personal income and capital gains). These states (minus Colorado) also have legislation known as “Right to Work” which prohibits “closed-shop” or forced unionism.

There is no reason that New Mexico can’t be an economically-prosperous state, regardless of the national or global economy. North Dakota, for example, which came in 7th in the ALEC report, has an unemployment rate of 3.5 percent and businesses there can’t hire people fast enough.

New Mexico has just as much natural wealth as North Dakota and, if various elected bodies like the Legislature and the Public Regulation Commission can find the will to reform our tax system and reduce unnecessary regulations, there is no reason that the Land of Enchantment couldn’t experience a similar boom.

The days of New Mexico being able to get by on the combination of a massive federal presence and pork-barrel spending are coming to an end. While perils abound, the fact is that if the federal government were enough to create prosperity, New Mexico would be among the wealthiest, not the poorest, states in the nation.

Change is coming. With strong leadership and a healthy dose of free market principles, New Mexico can become a more independent and prosperous state.

Paul Gessing is the President of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Report: State Income Taxes Impact the Economy Art Laffer, Stephen Moore Co-Author Report that Illustrates How No-Income Tax States Prosper
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