Category: Issues

Categories
Economy

New Mexico Has Surplus of Government Employees

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Big government is a fact of life here in New Mexico. With large military installations, Indian reservations, and federal lands (42 percent of the state is federally-owned), it is perhaps not surprising that the state receives a larger proportion of federal money relative to what its citizens pay in taxes than any other state. Also, not surprisingly, a relatively high proportion of New Mexicans work for the federal government.

While there is debate over whether the tremendous federal presence is a good thing or a bad thing for New Mexico’s economic health, there is little that New Mexicans can do about it one way or another. Our history, our wide-open spaces and our weather are responsible for bringing much of this federal largesse to our state.

According to data from the Census Bureau, New Mexico’s “big government” is not limited to the federal presence here. In fact, New Mexico taxpayers are burdened with the third-largest contingent of state and local employees per capita in the nation. And, unlike their federal counterparts, the expense of New Mexico’s large state and local bureaucracies is borne entirely by New Mexico taxpayers, not federal.

According to the Census data, 6.6 percent of New Mexico’s entire population (not just workforce) is employed by a state or a local government. As a percentage of overall economic activity, New Mexico’s state and local governments are bigger than those of any other state.

The governments of Alaska and Wyoming do employ greater percentages of their populations than we do, but lest one believe that state and local employment is related to land mass, it is worth noting that Nevada governments have the smallest workforce in the nation at 4.2 percent of the state’s population.

Economists going back to at least the days of Adam Smith have noted that governments, by their very nature, are relatively ineffective tools for creating wealth (such activity is best left to entrepreneurs in the private sector). The fact that government employees must be paid by redistributing wealth away from productive uses explains, in part, why New Mexico is one of the poorest states in the country.

Of course, wealth redistribution doesn’t account for all of the negative impacts of big-government. After all, those government employees are not being paid to do nothing; they are busy taxing, regulating, and redistributing wealth. Thus, having large numbers of government employees has been associated with a degree of economic harm beyond the so-called “dead weight” loss of taxation.

With all of the problems associated with having large numbers of government employees, it should be no surprise that Nevada, with its small state and local work force, is the fastest-growing state in the nation in terms of population. Given the choice, Americans usually prefer a small government that leaves them alone to relying on big government.

If big government is a problem, then what is the solution? It is imperative that governments avoid expanding their payrolls and taking on new tasks without looking for cuts elsewhere. This can mean systemic limitations on taxes and spending along the lines of those contained in the Taxpayer Protection Act as introduced by House Minority Leader Tom Taylor, R-Farmington, and Sen. Kent Cravens, R-Albuquerque, that would force government to grow more slowly, thus creating incentives for finding alternatives to expanding government and hiring new bureaucrats.

Barring such systemic changes, government could find private-sector companies that are willing to do the same job, but for less money. Local governments in particular should consider contracting with private-sector providers for garbage and recycling services, the provision of water, public hospitals, and the construction and operation of prisons and jails. These are just a few innovative ideas that have been successfully adopted by hundreds of governments across the country. If taken here in New Mexico, they would save taxpayers or customers millions of dollars.

There are many reasons why New Mexicans continue to suffer from high poverty levels. Having a bigger government than citizens can afford is a big one. Our elected officials need to recognize the problem and start implementing these and other creative ways to cut spending and reduce the size of government.

Paul Gessing is the president of the Rio Grande Foundation, a nonpartisan, tax-exempt research and educational organization dedicated to principles of limited government, economic freedom and individual responsibility.

Categories
Health Care

Senators’ Health Care Plans are Misguided

Outside of the Iraq War, the debate over health care reform is one of the most contentious issues in politics today. With ongoing debate in Washington and a flurry of activity in the states, the need to make health care more affordable is a mantra being adopted by politicians of both parties.

Unfortunately, despite the high-minded rhetoric, political intervention more often results in higher medical costs. One of New Mexico’s own senators, Republican Senator Pete Domenici – in conjunction with Senators Mike Enzi (R-WY) and Ted Kennedy (D-MA) – is now leading an effort that would ultimately drive up the costs of health insurance and may even inflict harm on the very people the Senators are trying to help.

The legislation, which has already passed out of one Senate committee, is known as the “Mental Health Parity Act.”

Although, Domenici’s desire to help those with mental illness is noble, it has led him to support a proposal that inevitably, if inadvertently, will harm both the mentally ill and the uninsured.

This bill would require that health insurance policies that provide coverage for mental illness must provide it in the same way that they provide benefits for other conditions. Thus, if the co-pay to see a family doctor is $20, then the co-pay to see a psychiatrist must also be $20.

In a free market, the decision of how to cover mental health benefits is left to the insurer and the insured. A mandate to require that mental health coverage be given parity eliminates that freedom.  Furthermore, mental health parity is one of the most costly of benefit mandates. Using actuarial data, the Council for Affordable Health Insurance, an insurance industry group, estimates that it can add between five and ten percent to the cost of a health insurance policy.

Few of the likely consequences of imposing a mental health parity mandate are good for employees. Forcing insurance programs to cover mental health the same way they cover physical illnesses and conditions will result in more expensive health insurance. That means more businesses will increase their insurance premiums or drop their insurance altogether, resulting in an increase in the number of uninsured. Another route that businesses might pursue is simply dropping their mental illness coverage from their insurance policies, meaning that employees will have less access to mental health benefits.

A reading of the Mental Health Parity Act suggests that Domenici recognizes that it will lead to higher costs. The bill tries to shield small businesses from rising health insurance costs by exempting any business with fewer than fifty employees. It also exempts any business whose health insurance costs rise more than 2% due to the mental health parity mandate.

Attempts to ask any of the three Senators what they thought about the cost of the bill proved fruitless. All three Senate offices responded to our calls, made over a two-week period, by saying the staff members who could address our questions were out of the office.

Thus far, only four benefit mandates exist at federal level. Unfortunately, benefit mandates are extremely common among the states, as most states have dozens, mandating everything from hair prostheses to massage therapists.  New Mexico, for example, has 45 such mandates.

Health care mandates at the state level have become such a problem that one of the most promising – albeit unsuccessful – efforts to reform health care in recent years was led by then-House Speaker Dennis Hastert (R-IL) and Rep. John Shadegg (R-AZ), both of whom wanted to change federal law to allow individuals to purchase insurance across state lines. This effort essentially would have forced insurance companies to compete across state lines.  That, in turn, would have pressured states to tailor their health care regulations in order to compete against each other.

Aside from the inherent cost, what makes federal mental health parity legislation so troubling is that it could start a trend that shifts mandates from the state to the federal level, thus closing off a potential route to reform and future cost reductions. Instead of raising costs by creating new mandates, Domenici, Enzi, and Kennedy and others should be working to cut health care costs by allowing consumers to purchase health insurance –including mental health insurance – across state lines.

Paul Gessing is the president of the Rio Grande Foundation, a 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.

David Hogberg is a Senior Policy Analyst for the National Center for Public Policy Research, a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems.

Categories
Economy Research Taxes

Cut Taxes and Reduce Spending to Fight Poverty?

Conventional wisdom is that bleeding-heart liberals care deeply about poverty while conservatives and libertarians would let children and the poor starve in the streets. A new study by Dr. Matthew Ladner and I that was published recently by the Rio Grande Foundation should dispel this notion and add weight to the argument that limited government is a better tool for lifting people out of poverty than bigger government.

Stepping back a bit to take in a broader world view, the case for limited government as a tool for reducing poverty has already been made on a global scale. The Cato Institute, Heritage Foundation, and a handful of other think tanks produce annual indices that clearly show the superior economic performance of nations with relatively limited governments like the United States, New Zealand, and Hong Kong when compared to the unlimited government and relatively impoverished nations of North Korea, Cuba, and Zimbabwe.

Those who support big government offer any array of excuses to justify the large gaps in living standards among free and un-free nations; our study demolishes these arguments by focusing narrowly on the relative performance of the 50 states on the issue of reducing poverty during the 1990s. Thus, it is more difficult to blame the poverty gap on cultural or resource differences.

The numbers are striking and clearly show that taxes and spending have a tremendous impact on poverty, but it is not the necessarily the impact that those who would spend ever more taxpayer money on government poverty programs will like. For starters, we wanted to explore the impact of taxation levels on poverty. So, we chose the 10 highest tax states and compared their performance over the decade to the 10 lowest-tax states. The low-tax states saw a decline in poverty rates more than 9% while poverty rates actually increased in the high tax states by approximately 2%.

Similar results were found when we looked only at childhood poverty. In the high tax states, poverty rates declined by a modest 2.8% while in the low tax states poverty rates dropped by a robust 10.3%. In a similar vein, childhood poverty in low tax states dropped by 9.26% while childhood poverty in high tax states actually rose by 3.4%.

The relative success of low-tax states in reducing poverty is somewhat unsurprising. Sure, less taxation spurs the economy, thus creating jobs and economic growth. But, what about spending? This time the authors compared the 10 states with the lowest per-capita spending during the 1990s with the top 10 states in per capita spending. In the low-spending states, overall poverty rates declined by a robust 8.42% while the big-spenders not only failed to reduce poverty rates, but they actually suffered an increase in poverty rates of 7.6%.

It is worth noting that New Mexico is among the top ten states in spending per capita and it ranks just behind Louisiana and Mississippi with one of the highest poverty levels nationwide. It is also noteworthy that Colorado led the nation in reducing childhood poverty during the 1990s while it had the fourth best record of reducing overall poverty. Colorado’s Taxpayers’ Bill of Rights was enacted in 1992 and implemented in 1993, so there can be no doubt that the law’s tax and spending reductions had a salutary impact on poverty, not the “doom-and-gloom” impact that opponents expected.

New Mexico Gov. Bill Richardson proposed (and received) an 11% budget increase for FY 2008. Not coincidentally, Republicans in New Mexico’s Legislature this year proposed a Constitutional spending limit amendment that is similar in many ways to Colorado’s. The path out of poverty is clear, but will New Mexico take it?

Mr. Gessing is the president of the Rio Grande Foundation, a 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.

Dr. Ladner is vice president for research at the Arizona-based Goldwater Institute and is an adjunct scholar with the Rio Grande Foundation.

Categories
Economy

Less Government, Less Poverty

New Mexico is a poor state. Most of us already know this, but what is less clear is what, if anything, can be done about it.

There are plenty of well-funded advocates for the poor – New Mexico Voices for Children is the probably the most well known – but their prescription for poverty relief often boils down to simply raising taxes to pay for more government poverty programs.

Needless to say, this policy prescription leaves many productive, tax-paying citizens with a bad taste in their mouths.

After all, nearly 30 percent of the money the average New Mexican earns is already taxed away by the federal, state or local governments.

Surely, if government programs that spent billions of dollars were the answer, we’d have the problem licked by now.

A new paper by the authors of this this column takes a close look at poverty trends here in New Mexico and nationwide and finds that lowering taxes and reducing spending, not bigger government, is the answer to poverty eradication.

For starters, Ladner and I found that the majority of the decline in poverty occurred before the advent of War on Poverty programs of the mid-1960s. In 1948, the national poverty rate was 30 percent. By 1966, the poverty rate had fallen to 15 percent. Since then, poverty rates have hovered in double-digits with the current rate residing at 12.6 percent. Clearly, the “Great Society” programs introduced in the 1960s have not done as much to lower poverty rates as the post-World War II economic boom did.

To analyze how poverty trends among the states, Ladner and I studied poverty data from the 1990s and compared the results of the top 10 and bottom 10 states in both spending per capita and in overall tax burdens.

The results will undoubtedly come as a surprise to those who think that government has the answers to reducing poverty.

Over the decade, the low-tax states saw poverty rates fall by more than 9 percent while poverty rates actually increased by approximately 2 percent in the high-tax states.

In the high-tax states, poverty rates declined by a modest 2.8 percent, while in the low-tax states, poverty rates dropped by a robust 10.3 percent.

In a similar vein, childhood poverty in low-tax states dropped by 9.26 percent, while childhood poverty in high-tax states rose by 3.4 percent.

The story was the same when we took a look at the impact of spending on poverty reduction. It is worth noting that New Mexico was one of the top ten states in spending per capita, yet it ranks just behind Louisiana and Mississippi with one of the highest poverty levels nationwide.

During the 1990s, overall poverty rates declined by a robust 8.42 percent in the lowest spending states while the big-spenders not only failed to reduce poverty rates, but they actually suffered an increase in poverty rates of 7.6 percent.

Notably, Colorado led the nation in reducing childhood poverty during the 1990s and had the fourth best record of reducing overall poverty during the decade, as well. With Colorado’s Taxpayers’ Bill of Rights having been enacted in 1992 and implemented in 1993, there can be no doubt that the law’s tax and spending reductions had a salutary impact on poverty.

New Mexico Gov. Bill Richardson has proposed an 11 percent budget increase for the next year alone. Not coincidentally, Republicans in the Legislature have proposed a constitutional amendment similar in many ways to that of Colorado.

As the data make clear, limiting spending and taxation are more effective means of reducing poverty than is bigger government.

For too long, New Mexico has relied on government spending – whether that meant federal largesse or state and local governments – but with poor results. It is time for New Mexico’s political leaders to limit government and stop tolerating high levels of poverty.

Gessing is the president of the Rio Grande Foundation, a nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility. Ladner is vice president for research at the Goldwater Institute, based in Arizona.

Categories
Local Government Notable News

New Mexico’s Legislative Session: Busy But Undistinguished

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Many bills were passed during what was by all accounts a busy 60-day session, but the important question is whether we will be better or worse off than we were before. It is impossible to discuss everything that happened, but here are a few important points:

First and foremost, credit must be given to the governor, the governor’s task force, and those in the Legislature who worked so hard to protect taxpayers from the abuse of eminent domain. Assuming Gov. Bill Richardson signs the bill, which is based on a concept he has supported, property owners will be able to rest a bit easier knowing that local governments cannot take their land whenever they feel like generating more tax revenue.

Another good bit of news is that no tax hikes occurred this year. While the idea of raising taxes in a time of record-setting revenues may seem absurd, several tax hikes ­ including a 60 cent-per-pack increase on cigarettes ­ were considered and defeated this session. Raising taxes in times of budgetary crisis is a bad idea, but hiking them when revenue is overflowing from state coffers is inexcusable and sends a message that government is insatiable.

The absence of tax hikes was good and some taxes were even cut, but the small ($94 million) package of tax cuts passed this year was too small to have an impact on New Mexico’s economy. Worse, the cuts that were actually made ­ including a gross receipts tax deduction for disabled street vendors ­ were targeted in ways that will not improve New Mexico’s economy.

Despite its recent success which has coincided with a strong national economy, New Mexico remains one of the poorest states in the country. Our political leaders should be working day and night to improve that dismal statistic by reducing our heavy tax and regulatory burden. Small, narrowly-targeted tax breaks are not the answer.

Unfortunately, several actions taken during this session will have a negative impact on New Mexicans for years to come starting with the 10 percent increase in the general fund. That rate of spending growth is much more than double the rate needed to keep pace with inflation and population growth (about 4 percent).

With government growing so quickly, once oil and gas revenue suffer even the slightest setbacks, New Mexico’s budget could be in serious trouble. Worse, this rapid growth in spending took place while legislation that would have limited future spending growth that was introduced in both Houses ­ the Taxpayer Protection Act ­ was not seriously considered.

So, where will all of this new money go? A large portion has been allocated to increasing teacher salaries and expanding the state’s Pre K program. Although higher teacher salaries and expanded Pre K have been touted by many self-interested advocates among the education establishment, studies have shown that the benefits of Pre K evaporate by fifth grade. Worse, universally increasing the salaries of all teachers at once will do nothing to attract and retain the best teachers. Basing pay on teacher quality would be a far more effective way to increase teacher quality.

While more money was thrown at the teaching establishment this year, legislation that would allow taxpayers to take a tax credit for donating money to provide scholarships for needy children was killed once again. This effort which the teacher unions mislabeled “vouchers” would have given poor children and their parents the same ability as wealthy parents have to choose the school that is best for them whether that is a public or private school.

The last major legislative faux-pas of the session was increasing the minimum wage to $7.50 an hour. Fortunately, McDonald’s and most other employers of low-wage workers are already paying at similar wage rates and the wage will not automatically increase with inflation, thus somewhat mitigating the law’s negative impact. But New Mexico is a poor state with relatively low salaries; this wage increase will particularly harm border cities because none of our neighbors mandate wages as high as $7.50.

It was an action-packed session and some good was done. Unfortunately, massive spending without any economically-significant tax cuts will and a higher minimum wage will make it more, not less difficult for New Mexico to catch up with the rest of the country.

Paul Gessing is the president of the Rio Grande Foundation, a 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.

Categories
Economy Tax and Budget

Tesla Deal No Model for Economic Development

I was as happy as the next person when Tesla Motors announced last month that it was locating its new factory in Albuquerque. The company is planning to build electrically-powered sedans ranging in price from $50,000 to $65,000 here. If the car is successful – that’s a big “if” considering the car has not been tested by anyone outside the company – Tesla could be a boon to both the state and local economies.

The arrival of Tesla may indeed bring the jobs and economic development being promised, but it must be pointed out that this type of incentive-based “economic development” is not the best or fairest way to improve New Mexico’s economy. Tesla will receive an estimated $20 million in tax incentives. How many small business men and women work every day to grow their businesses, almost always without special tax breaks (and usually besieged by all manner of government regulations)?

The question of “fairness” may sound idealistic with special interests spending millions of dollars to get their “fair share” in Santa Fe and from the City, but our tax policies should be built on the principal of fairness. Indeed, giving special breaks to one company not only shifts the tax burden to the rest of us (including small business), but it creates incentives for companies to spend even more on unproductive activities like lobbying.

The fact that the state is considering investing permanent fund money into Tesla’s unproven electric roadster which happens to fill an “environmentally-friendly” niche makes the relationship between a private company and government a bit too cozy.

Perhaps more importantly, economic research has shown that the best way to do economic development is to keep taxes low, and to the best extent possible, levy them fairly on all businesses.

There is no way for taxpayers, or for Governor Richardson and Mayor Chavez, to know whether Tesla will be the next big thing or a bust. But, to use a baseball analogy, rather than using tax incentives to go out and sign the next “free agent,” New Mexico needs to reform its tax policies in ways that allow the state to build talent from within. This will allow New Mexico to finally become an economic powerhouse.

Paul Gessing is the president of the Rio Grande Foundation, a 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.

Categories
Notable News Public Comments and Testimony

Free Market, Free Thinking: A Conversation with Paul Gessing of the Rio Grande Foundation

Albuquerque’s alternative weekly newspaper, The Alibi, recently did a full-length interview with Paul Gessing, President of the Rio Grande Foundation.  Paul discusses what exactly the Foundation does, not to mention both the intellectual and physical journeys that led him to New Mexico.

Click here to read the story. Click here to read a reader’s hostile response to the piece.

Categories
Economy

Don’t Let Mayor Waste Taxypayer Money on New Arena

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Mayor Martin Chávez is at it again. A few months ago he wanted to put taxpayers on the hook for a $300 million tourist trolley along Central. Now he wants a 16,000 seat arena and hotel complex with much of the expected $350 million price tag to be footed by taxpayers.

As much as we all desire Albuquerque’s Downtown to be a vibrant place to visit, spending megabucks on an arena is a costly and uncertain way to spur development. Like the streetcar, a taxpayer-subsidized arena and hotel complex will not generate new investment, but will suck money from other areas of the city and send it Downtown.

Economists have repeatedly found that there is no net increase in economic activity derived from stadium and arena projects. Dennis Coates and Brad R. Humphreys, for example, have explained that “As sport- and stadium-related activities increase, other spending declines because people substitute spending on sports for other spending.” In other words, fan money spent at a new arena would likely have gone to other entertainment absent the arena. Thus, net economic benefits are zero.

Of course, that is assuming that Albuquerque even finds a regular tenant for the arena that can draw a crowd. Given the track record of the area’s minor league hockey and basketball teams, even a permanent minor league tenant for the proposed arena may not mean success and would likely result in massive losses to taxpayers as the building sits empty much of the time. After all, the Scorpions are selling a disappointing average of just over 3,000 tickets per game in a brand new 6,200 seat arena in Rio Rancho and attendance at Thunderbirds games at Tingley averages in the hundreds.

These points are not meant to disparage the Albuquerque sports fan, but a team from any of the “major league” NBA, NHL, or Arena Football leagues is not on the horizon. More importantly, given the relative population and income levels found in the Albuquerque metropolitan area (our population ranks 65th in the country), there are a number of cities in line to get big-time professional franchises before us.

If a group of private investors were considering whether or not to invest their own money in a sports arena, they would undoubtedly look for signs that additional capacity was needed or that a market niche was being left unfulfilled. Clearly, that is not the case here in Albuquerque. With Rio Rancho struggling to fill an arena less than half the size of that being proposed for Albuquerque and Tingley Coliseum having experienced “an inconsistent event demand over the last few years,” according to the consulting firm that was paid by the city to evaluate the need for the new arena, it would appear that Albuquerque has a surplus of arena space, not a deficit.

So, why is Mayor Chávez pushing for a 16,000-seat arena despite the obvious lack of need? First and foremost, unlike a private investor attempting to turn a profit, Chávez can leave his legacy using our tax money. The wise use of resources is clearly not his first (or even second) concern. Secondly, although private arenas have been constructed in Columbus, Ohio, Detroit, Chicago, outside of Detroit, and in Washington, D.C., just to name a few, again, there would have to be some reason besides blind optimism for an investor to take interest.

Chávez, like most politicians, would rather spend taxpayer dollars on luxury items like trolleys and arenas than on maintaining streets and bridges and keeping the roads clear of snow. Ironically, despite what many would call Chávez’s “progressive” political bent, this arena project would do nothing more than take $350 million from middle and low-income Albuquerque taxpayers and give it to the wealthy developers and patrons of the proposed sports arena and high-end hotel, both of whom are likely to be wealthier than the average Duke City resident.

The case against a taxpayer-financed arena is rather damning, but in the mayor’s head it all boils down to the simple fact that he thinks he knows how to spend the taxpayers’ (our) money better than we possibly could. It happened before with the trolley; again it is up to the citizens of Albuquerque to tell their big-spending politicians “no!”

The Rio Grande Foundation is a research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Categories
Energy and Environment Oil & Gas

Politics and the State’s Energy Problems

New Mexico businesses— whether directly engaged in the energy industry or not— should be wary of proposed policy changes supposedly targeted at energy companies. If enacted, these laws would actually harm users of energy (residential as well as business users).

The misguided proposals under consideration would tax alleged “windfall profits” and address global warming in a wasteful and counterproductive way. New Mexico politicians have a disproportionately powerful place in all this. Democratic Sen. Jeff Bingaman is the new chairman of the Senate Energy Committee and the senior Republican and immediate past chairman is Republican Sen. Pete Domenici. Meanwhile, our ambitious Gov. Bill Richardson, a former Energy Department cabinet secretary, has spoken out for both misguided proposals.

THE NEW CONGRESS AND THE “WINDFALL PROFITS TAX”: Although neither Bingaman nor Domenici seems to be enthusiastic about a proposed windfall profits tax on oil and gas companies, the newly resurgent Democratic leadership in both houses has control of the agenda and is making noise about such a proposal.

A little perspective is needed here: Even during the “spike” of gasoline prices when Hurricane Katrina knocked out much import and refining capacity, the price of gasoline came nowhere close to its all-time high. When we compare prices over time, we need to adjust them for changes in the purchasing power of the dollar. Adjusted for inflation, 1981 gasoline prices were some 24 percent higher than they were during last year’s $3-plus-a-gallon “spike.” Moreover, disposable income in New Mexico has increased since 1981. The average New Mexican’s disposable income could buy 88 percent more gasoline even at the peak of the 2005-06 “spike” than it could in 1981.

The last thing we need now is for government to make matters worse by bashing profits. Seeking profits (and avoiding losses) is what drives all sectors of that market economy; and it is why we are prosperous.

When we see rising profits we can be sure that more resources will be devoted to the profit-generating activity. It may come about a bit slower in the case of oil and gasoline (compared, say, to Microsoft) because of the difficulties of bringing new wells into production or of building and expanding refineries.

Oil companies’ profits may be a little higher than their long-term average; but those profits are not unreasonable compared to other industries. Moreover, taxes paid by oil companies are actually higher than their profits.

CARBON “CAP AND TRADE” AS A SOLUTION TO GLOBAL WARMING: Putting aside questions of whether recent temperature variations are outside the normal swings that have occurred over many centuries, and (if so) whether or not such changes are human-caused, a policy that administers a system of artificial caps on energy sources, poses serious problems for our national— and state— economies:   Giving federal and state bureaucrats control over how much carbon is emitted and from what sources would be counterproductive, highly complex and a nightmare to administer. It would mean higher energy prices and a system that is wide open to political favor seeking.

The politics of carbon emissions would inevitably result in large, unfair transfers of wealth. For example, under the Kyoto treaty, to which the U.S. is not a party, purchases of carbon credits are flowing from the European Union to Russia in massive amounts. Do we want to have the U.S. become victim to this sort of dollar outflow?

It turns out, intentionally or not, that the U.S. is at a real disadvantage when it comes to reducing carbon emissions compared to Europe and Russia. The year selected as the base year from which to reduce carbon emissions (1990) just happens to coincide with vigorous economic activity in the U.S. and recessions in Europe and Russia. In 1990 Europe and Russia were already well below their normal emissions. Nonetheless we find that Europe and Russia are unable to meet their targets.

There are changes in energy policy that would be helpful and would especially benefit our energy producing state. We could strike a better balance between benefits and costs when it comes to regulation. We could allow the building of new refineries. We could relax restrictions on drilling and exploration for oil. All of these actions would reduce the costs and risks for producers, thereby benefiting New Mexico.

Categories
Economy Tax and Budget

New Mexico’s Gross Receipts Tax: What Not to Do in State Taxation

As legislatures convene across the country, the state of New Mexico is being thrust into an unlikely role as a model for states that are looking to increase revenues by broadening their tax bases. North Carolina and Missouri are just two of the many states expected to consider broadening their sales tax bases this year. Ohio and Texas have gone even further by joining New Mexico in adopting a gross receipts tax. Whether taxing services or goods, effective tax rates under a gross receipts tax regime are dramatically-higher than the stated rate.  In New Mexico, for example, because of the gross receipts tax effective tax rates are one-third or more higher in New Mexico than in other states.

Unlike a sales tax, gross receipts taxes like New Mexico’s are taxes on the “privilege” of doing business in the state. Under New Mexico’s system, the taxable amount for a service producing firm is the gross amount — not net after business expenses — and the tax liability belongs to the business instead of the customer. That is, when an entrepreneur sells her service, she has to pay tax on the entire amount received even though a sizable portion of her receipts may be necessary to cover her costs. The more costs she has relative to her receipts, the more burdensome the GRT. High overhead service providers, such as doctors, have been particularly hard hit by this tax in New Mexico. Goods producing firms get off a little easier in that they deduct the cost of any raw materials from the gross amount.

Unlike New Mexico, Ohio and Texas levy their GRT’s at rates of one percent or less. That is a far cry from New Mexico where rates run as high as 7.8%. Hawaii and South Dakota — the only other states that levy broad-based taxes — do so at rates of only 4.5% and 6 percent respectively (South Dakota does not tax income).

In discussing Ohio’s need for a GRT, Republican Speaker of the House Jon Husted commented, “Ohio needs a business tax with a broad base and a low rate. We have only a few businesses pulling the wagon and a lot of people riding in it. Everybody is going to pull the wagon a little bit, and we’re going to benefit everybody.”

Husted and his colleagues in Ohio (and Texas) would be wise to study New Mexico situation so as to understand the problems inherent in GRT’s and to learn from some New Mexico-specific mistakes. All gross receipts taxes, for example, create the problem of “tax pyramiding.” Pyramiding occurs when one business purchases a taxed good or service from another business. So, taxes build upon one another as the entrepreneur gets her roof fixed, purchases accounting help, legal help and so on.

Even more problematic than tax pyramiding is the perverse incentives created under the GRT. In New Mexico, rather than maintaining the tax at relatively low rates across the board, the tendency has been for politically influential industries to carve out specific exemptions for themselves in order to reduce their tax burden. One recent example was the successful effort by managed care firms to exempt their industry from the gross receipts tax. Simultaneously, the gross receipts tax for fee-for-service firms actually went up.

Similar exemptions have been carved out for groceries, the film industry, aviation, and space travel, just to name a few well-connected or sympathetic interests. In the meantime, gross receipts tax rates have risen statewide by nearly a full point in many places. Now, when businesses consider locating in New Mexico, some sort of gross receipts tax exemption is nearly always negotiated. This behavior skews the marketplace, gives politicians undue influence over business activity, and ultimately makes New Mexico’s economy less efficient.

States that are now considering dramatic broadening of their tax bases should look long and hard at New Mexico’s experience before acting. Perhaps such taxes can be adopted with safeguards to protect against higher rates and special-interest carve-outs, but “tax pyramiding” is nearly unavoidable and remains an economically-unattractive outgrowth of broad-based taxation regimes.

Dr. Messenheimer is a senior fellow with the Rio Grande Foundation, a 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.

Mr. Gessing is the president of the Rio Grande Foundation, a 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.