Tax and Budget
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TOPS 3: Controlling Spending in New Mexico

09.26.2004
State government spending is out of control. Real per capita spending on Medicaid is up 210% over the past 13 years. In public education, per capita spending is up 19% over the same period. The ineffective and unnecessary growth of government has severely reduced prosperity in New Mexico.
Have you ever wondered what New Mexico might be like had its citizens more freedom to prosper? What if its government had not grown so fast? We can get a good idea by looking at our neighbor to the north. Colorado has imposed tax and spending limitations by rule since 1992. These limitations are known by the acronym TABOR (Taxpayers’ Bill of Rights1). State spending is limited in Colorado to the rate of inflation plus the rate of population growth. In essence Colorado holds real state spending per capita constant, thereby preventing further erosion of individual freedom.
Suppose (like Colorado) New Mexico had implemented a constitutional limit on Leviathan in 1992. What would now be the size of its general fund budget as constrained by the rates of growth of population and the price level? Population has grown by an annual average of 1.6 percent in the period from July 1992 to July 2003. The price level has grown by an annual average of 2.5 percent from February 1992 (index of 138.6) until February 2004 (index of 186.2) as measured by the consumer price index. New Mexico would have limited general fund average annual growth to 4.1 percent (1.6% population growth plus 2.5% inflation).
The budget, however, has grown at a rate of 6.0 percent annually since 1992 (rather than at a constitutionally constrained 4.1 percent). Since the New Mexico general fund budget was $2,044.9 million in FY 1992, constitutional constraint would have limited it to $3,447.8 million for FY05 (beginning July 1 2004). Contrast that with the actual FY05 budget of $4,380.6 million! Limiting Leviathan would have saved the taxpayers $932.8 million. That works out to be $491 for every man, woman and child in New Mexico. According to our estimates such a saving would have permitted a gross receipts tax reduction of some two and one-half percent!
Some other observations based on the general fund budget over time:
  • Governor Johnson was able to hold spending to an average annual rate increase of 5.0 percent during his eight years in office, so total real per capita growth of the general fund budget was 7.5 percent. Despite Governor Johnson’s effort, New Mexico’s general fund budget for the comparable 13-year period has grown to be 28 percent more than Colorado’s in real terms.
  • We have previously examined Medicaid and found cures for its many ills. The Medicaid portion of the budget has been growing at an annual average rate of 13.3 percent! Total real per capita growth of the Medicaid portion of the budget has been more than 210 percent. If something is not done soon, it will bust the budget.
The prospect of a Colorado-like constraint on general fund spending is sure to raise howls of protest from wishful thinkers who believe that more spending makes things better. What about the kids? What about the poor? What about health insurance? The answers to these questions require some skepticism as to how government actually operates. For example, how long will the people engage in the wishful thinking that soviet-style, top-down control will eventually lead to “education reform” that really works? How long will they continue to ignore the incentives that make Medicaid such a poorly designed program and budget buster? Can they answer the question: How much more spending will be enough?
The Rio Grande Foundation envisions an active program of research and public information on these key questions about prospects for limiting Leviathan in New Mexico:
1. How would it impact the state’s main budget categories?
  • Education
  • Medicaid
  • Highways
  • Public safety
  • “Other”

2. What would be its effects on New Mexico’s economy?

  • Economic growth
  • Jobs in the private and public sectors
  • Provision of primary public goods

3. What has been the experience of other states that have enacted spending and taxation limitations?

  • State budgets
  • Attracting new business and residents to the state
  • Distribution of income
  • Ability to stick with the plan and resist weakening of the limitations
4. What is the best way for New Mexico to structure tax and spend limitations?
  • Alternative budget rules
  • Tax rate reductions versus the need for a rainy day fund
  • Accommodation of economic downturns
  • Constraints on local governments
Do not confuse this with what is now called a “taxpayer bill of rights” in New Mexico. New Mexico has no limit on spending and taxing.
Written by Kenneth Brown and Harry Messenheimer, PH.D.