Reform This!
Coherent Tax Strategies for New Mexico
By Harry Messenheimer, Ph.D.
President, Rio Grande Foundation
October 2003
Executive Summary
The report begins with the premise that tax reform ought to remove faults
and defects that impede our prosperity. Given that premise, three major
faults and defects now exist with New Mexico's tax system. The report
documents these three faults and defects and assesses where we are now
in correcting them.
Problem One: Excessive Government Spending
The first major fault and defect is overspending. Spending drives the
need for tax revenue. Since spending to too high, taxes are too high.
The report documents specifically how smaller, less intrusive government
will increase prosperity.
The bias toward excessive spending is likely to undermine the only growth-oriented
piece of legislation yet passed-the five-year phase-in of reductions in
income tax rates. Without fiscal discipline, it is all but inevitable
that these cuts will be rescinded; or they will be replaced by other tax
increases.
One way to control spending is to constitutionally prevent the legislature
from excessive spending. New Mexico should copy the good limits that Colorado
enacted over 10 years ago.
Problem Two: Gross Receipts Tax on Services
The second major fault and defect is our gross receipts tax. The main
problem is that New Mexico taxes services and other states do not, putting
service producing businesses at a gross disadvantage compared to other
states. Goods producing businesses are also harmed by this tax, since
many of them must procure taxed services (legal, accounting, roof repair
and so on) as part of their business activity. These taxes raise their
costs compared to comparable businesses in other states. Many adjust away
from New Mexico as a result.
We have many options to improve the gross receipts tax situation. We
can reduce the overall statewide rate of tax. Or we can reduce the rate
of tax on services. Either option would greatly improve New Mexico's economy
by making our tax structure much more friendly compared to other states.
Problem Three: Ineffectiveness of Welfare Programs
The third fault and defect is the wishful thinking that our tax-transfer
programs actually help the poor. The reality is that these programs are
counterproductive. Our welfare system is an abomination. While the overall
tax-transfer system is progressive, the poor actually suffer from effective
marginal tax rates of 50 percent on earned income. The report clearly
documents that in its assessment of the bigger picture of federal and
state tax and transfer programs in toto. In fact, perhaps the biggest
contribution of the report is that it brings overall welfare incentives
into the light of day.
Since incentives faced by the poor are all wrong and conventional wisdom
about taxes and transfers is all wrong, the usual proposals purported
to help the poor (higher taxes on the "rich" to fund additional
transfers to the "poor") amount to wishful thinking. What we
need to do is lower effective tax margins at all levels of earned income.
Medicaid reform would be a good place to start.
Prospects for Reform Now Are Dim
Unfortunately we now seem poised to make things worse under the guise
of "reform." Rather than providing for "maximum economic
development benefits," which was the charter of the recent "Blue
Ribbon Tax Reform Commission," most of the "reform" proposals
will do just the opposite. Moreover, nothing is being done to address
the three problems documented in this report "Tax reform" has
become code for net tax increases.
We need to change our mindset about the proper scope and funding of government
in New Mexico. Until we do, we will continue to be ranked near the bottom
for everything good and near the top for everything bad.
Download Adobe Acrobat document of full
report
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