Stimulate New Mexico Economy by Phasing Out Income Tax

With economic growth at a standstill nationwide and long-term help from Washington unlikely, New Mexico’s political leaders should consider ways to stimulate economic growth in the Land of Enchantment. The problem is compounded because Congress’s poor excuse for a stimulus will do nothing for the state or national economy. New Mexico should instead consider stimulus that includes both short and long-term, positive policy changes.

The problem with the “stimulus” enacted by Washington is that entrepreneurs and families make their decisions based on future expectations, not just how much money they have in their pockets at a given moment. This means that the basic factors upon which New Mexicans (and other Americans) make their daily economic decisions remain unchanged. The “stimulus” is doomed to failure.

But this does not mean that policymakers are powerless to boost the economy. A new Rio Grande Foundation study, “Stimulating New Mexico’s Economy by Phasing out its Personal Income Tax,” provides a simple plan which would stimulate New Mexico’s economy by building on the state’s recent success in cutting taxes.

Six years have passed and New Mexicans may not remember it, but the state’s top personal income tax rate was 8.2 percent back in 2002. Gary Johnson had attempted to cut this high rate, but Governor Richardson did in fact manage to gradually reduce rates to the point that the top income tax rate is 4.9 percent this year. Not coincidentally, recently-released data from the Bureau of Business & Economic Research at the University of New Mexico show that since these rate cuts began, New Mexico’s income levels have improved from 47th in the nation to 43rd.

A jump of four places may not seem like a great leap forward, but considering that the state’s ranking had held steady at 46th or 47th in the nation since at least 1990, it is a huge improvement in New Mexico’s ranking. It is also a good sign that cutting income taxes can have a dramatic, positive impact on economic growth.

Continuing the success of these tax cuts is the essence of the Foundation’s proposed economic stimulus. Using data based on the economic impact of these recently-completed tax cuts and based on historic revenue growth rate of 6 percent, New Mexico could do away with its personal income tax after four years. This could be done if policymakers in Santa Fe simply restrained annual General Fund spending growth to 4.5 percent for the next four years.

Annual budget growth of 4.5 percent is relatively slow, especially when compared with New Mexico’s 8.4 percent rate of spending growth over the last four years. Nonetheless, it is still possible. In fact, Albuquerque’s annual budget (to use just one example) has grown at just 4.35 percent in recent years. Obviously, restraining spending to 4.5 percent annually for a mere four years in an effort to eliminate the income tax is feasible.

Why would New Mexico wish to eliminate the income tax? Nine states in the nation lack personal income taxes. Not surprisingly, the average resident in each of those states is wealthier than the average New Mexican. In fact, the average resident of a non-income tax state made $7,000 more than the average New Mexican in 2007. What would you do with $7,000 ever year?

Cutting income tax rates, especially if the ultimate plan is to eliminate the tax entirely, will help New Mexico’s economy immediately. After all, particularly in times of weak economic growth, entrepreneurs and employers of highly-skilled workers are looking for ways to cut costs. Taxes are one cost that businesses and workers alike work hard to avoid.

Voters should always be careful when politicians talk of government policies stimulating economic growth. Fortunately, eliminating New Mexico’s personal income tax returns resources to productive uses, thus allowing each of us to stimulate the economy more effectively than any other decision made in Santa Fe (or Washington) possibly could.

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.