The state of New Mexico and southern New Mexico in particular, face a great opportunity. One of America’s great railroads, Union Pacific, is hoping to build a $400 million railroad hub in Santa Teresa. While there would be a few, relatively minor, tax incentives given to the company, this deal, if it is approved by the Legislature, would be a huge economic boon for the state.
Why is that? First and foremost, no taxpayer funds would actually be spent on this project. The tax on locomotive fuel would be eliminated, but millions of tax dollars would flow into state and local coffers annually with Santa Teresa becoming an important hub of economic activity. Also, the Union Pacific facility represents a huge investment of private capital in the state. This rail yard would stay in the state for decades (or more) and could even lead to further increases in rail and intermodal transportation activity in southern New Mexico. All of this is good news, not to mention that freight rail is a green industry.
Unfortunately, some of our elected officials, failing to understand the difference between spending and taxes left uncollected have conflated the Union Pacific issue with that of the film industry’s generous 25 percent subsidy on all activities the industry undertakes in New Mexico. This is not taxes uncollected; rather it is spending to the tune of $70 million annually.
Sen. Michael Sanchez, one of the most powerful Democrats in the state Senate recently questioned Gov. Martinez’s pledge to cut New Mexico’s film subsidy from 25 percent of everything spent in the state to 15 percent, while at the same time eliminating the locomotive fuel tax to help close the Union Pacific deal. Of the Union Pacific deal, Sanchez said, “Isn’t that a subsidy? Isn’t the railroad one of the most subsidized industries in the country?”
I don’t pretend to know all there is to know about the railroad industry and its finances, but this is about New Mexico and what it offers various industries. Viewed from that lens, New Mexico does very little for the freight railroad industry (the RailRunner is another matter entirely) but does a great deal for film.
In my view, no industry has a right to take my hard-earned money directly in the form of taxes. That makes the two issues very different with the Union Pacific arrangement far superior both for taxpayers and New Mexico’s budget.
Further differentiating the deals is the fact that once it is built, Union Pacific is not likely to move its rail hub as it would be prohibitively expensive to do so. The film industry, on the other hand, is already threatening to pick up and move based on the mere threat of a reduced annual subsidy. They can easily do so because the industry can and has quickly moved to states that offer the sweetest deals. Simply put, it is not a sustainable industry in New Mexico.
While the Union Pacific deal will ultimately be a big winner for New Mexico, some purists will question why the state should offer special deductions and deals in the first place. This is indeed a valid point and, ideally, taxes would be low enough that New Mexico would not need to offer special deals to Union Pacific or anyone else. Until then, however, large businesses with the power to do so will continue to negotiate special deals.
Small businesspeople, on the other hand, must bear the burden of New Mexico’s unique gross receipts tax which covers services and business inputs, while also paying income taxes at a top rate of 4.9 percent while Texans pay nothing. This is the reality of tax competition and it is one reason why Texas has continued to create jobs and attract businesses despite tough economic times.
If New Mexico taxpayers are smart, they’ll phase out or abandon welfare payments for movies, provide the limited exemptions necessary to attract Union Pacific, and work to make the state’s tax and regulatory climates more attractive to generate more growth at home.
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.