In recent years hundreds of thousands have fled California due to the high cost of living and its restrictive regulation and taxation. Individuals and firms have relocated to Texas, Nevada, Utah, and Colorado. Unfortunately, New Mexico has not benefited much from this situation. What is the reason for this? What is New Mexico lacking? The answer is economic freedom. While New Mexico’s neighbors all have above average economic freedom, New Mexico ranks below all U.S. states with the exception of West Virginia. In order for New Mexico to be considered a competitive alternative for businesses to locate, it must make reforms that increase economic freedom.
First, New Mexico needs to give more freedom to workers and employers to negotiate wages that are mutually beneficial without government interference. New Mexico has one of the highest poverty rates in the country with average wages well below the national average. To combat this condition, New Mexico has imposed the most restrictive minimum wage in the region which is currently set above the federal level. It has a higher minimum wage than Utah, Texas, and Oklahoma. It is true that Arizona and Colorado have slightly higher minimum wages, but the minimum wage is still more restrictive in New Mexico given its relatively lower market wages.
Additionally, the City of Santa Fe has set its own local minimum wage to $10.29 an hour, the highest rate of any city in the nation. This is astounding economic malpractice in such a poor, low-income state.
Policymakers favoring a higher minimum wage have the mistaken notion that legislating higher wages leads to higher labor productivity. Economic research has demonstrated that it just does not work out that way. Higher wages are the result of policies that lead to higher productivity. The minimum wage only hurts the very group that it intends to benefit by reducing employment opportunities for the least well off. Why would firms choose to locate in New Mexico rather than Texas and Utah which already having thriving private sectors to work with? It makes no sense to artificially introduce policies that put New Mexico at a further disadvantage.
Second, New Mexico’s economy is too dependent on the public sector as measured by government consumption, transfers and subsidies, and government employment. This must be reversed. New Mexico government has recently cut spending, but much more needs to be done in the coming years. A prosperous economy cannot be too dependent on the government sector, at least not in the long run.
As governments are forced to make necessary cuts due to unsustainable government spending that has taken place in recent decades, New Mexico will suffer disproportionately to states which are less dependent on the public sector. If the size and scope of government were reduced in New Mexico, more businesses would be willing to locate within its borders and new businesses which add value to society will be more likely to succeed. A good start would be to reform public pensions which are significantly underfunded.
Finally, New Mexico has a tax burden higher than the national average. In terms of the income tax, New Mexico is comparable to neighboring states with the exception of Texas which has no income tax. New Mexico could improve its economic freedom by eliminating the gross receipts tax and replacing it with a less complicated sales tax and reducing the corporate income tax rate which is one of the highest in the region.
New Mexico has lagged behind the rest of the country for too long. It’s time to make the reforms that will allow New Mexico to thrive. Excessive government involvement in the economy has not been effective in improving economic opportunities for the majority of New Mexicans. Policymakers will do better by returning to individuals the ability to determine their own economic paths through lowering restrictions that currently limit economic freedom.
Nathan J. Ashby holds the Western Hemispheric Trade Research Professorship at the University of Texas at El Paso and is co-author of Economic Freedom of North America published by the Fraser Institute.