Economy Tax and Budget

TOPS 2: Executive Summary

Ensuring liberty, opportunity and prosperity for all New Mexicans begins with curtailing the growth of government. Ineffective and unnecessary government growth means that our tax rates have remained too high. What to do? Taxpayers themselves must take control. Except when the approved by a vote of the people, the legislature would be limited by Constitutional Amendment to annual spending increases equaling the rate of population growth plus the rate of inflation. In other words, absent explicit taxpayer approval real per capita spending would remain constant.
Taxpayer Controlled Government Growth
Over the past 13 years spending by New Mexico state government, adjusted for inflation and population growth, has increased by 28%. 13 years ago, as measured in today’s dollars, our state government spent $1,783 for every man, woman and child in New Mexico. Today, however, that figure is $2,285.
Assume that in 1992 state government was spending enough money to provide essential government services to its residents. To maintain this level of service, government spending would need to grow to accommodate inflation and the increase in population. As mentioned above, New Mexico state spending has far exceeded this basic maintenance level.
And for this increased spending we ask – are our children receiving better education than in ’92? Is there less poverty, fewer uninsured individuals, or improved health care in New Mexico? Overall, can we even notice any increase in government services compared to ’92?
Sadly, the answers are NO. And, since our taxes have funded this ineffective and unnecessary government growth, tax rates have remained unnecessarily high. The problem is that unnecessarily high tax rates have significantly retarded our prosperity. How high are our tax rates? The graphs nearby depict comparative 2005 tax rates for the major revenue sources for which our tax rates are way out of line1. The gross receipts tax rate on services is a disaster. It creates a wedge between consumers and service providers that is some 40 to 50 percent higher than in other states. This wedge has the effect of doubling the damage done by the tax. This tax might better be called the “send higher wage jobs to other states” tax. Likewise, our excise tax rates (except for gasoline) tend to be way higher than the national median; and the tax wedge reduces economic activity similarly. Recently many other minor tax and fee rate increases will do even more damage to our well-being.
We can fix the problem with smaller government. Smaller government leads to lower tax rates and increased prosperity. We call this phenomenon “economic freedom.” Liberate a people from the burden of a growing government and they will take advantage of increased opportunity and produce greater prosperity for all. The Rio Grande Foundation calls it Liberty, Opportunity, Prosperity. It really works.
The link between the size of government and the relative prosperity of that government’s constituents has been well documented. The National Center for Policy Analysis and Canada’s Fraser Institute found that if New Mexico had average economic freedom, then its per capita gross state product would be $2,329 higher than it is today. And Professor Richard Vedder (2002) finds that if New Mexico only took the average amount of taxes as a percentage of income, then its per capita income would be roughly $1,500 higher than it is today. Additionally, Messenheimer in a 2000 RGF study summarized what might have been for New Mexico: If New Mexico now had state and local governments that were only slightly more coercive than the lower 48 average (instead of significantly more coercive as is the case now), then the median income for 4-person families is predicted to be $9,797 higher and per capita income $6,462 higher than they are today in today’s dollars.
Still not convinced? Ask the following question. If claims about all the magic of economic multipliers from increased government spending were true, shouldn’t New Mexico with its high per capita government spending be one of the most prosperous states in the nation?
How do we get control of the growth of government? How do we ensure liberty, opportunity and prosperity for future generations of New Mexicans? The people of Colorado asked themselves the same question 13 years ago; and they came up with the right answer. They took control.
The Taxpayer Bill of Rights
In 1992 Colorado voters passed a constitutional amendment that required that tax increases be approved directly by the states voters. Without this explicit approval, the amendment limited growth of taxes and spending to the previous year’s spending multiplied by a factor of inflation plus population growth, thereby keeping real spending per capita at a fixed rate year-to-year. This amendment was aptly named, the Taxpayers Bill of Rights (TABOR). In just five years, 1997 – 2001, TABOR forced the Colorado state government to return $3.25 billion of over-collected taxes to the taxpaying citizens of the state. This equals to $800 for every man, woman and child in the state. By limiting the growth of government to a bearable level, Colorado’s economy experienced one of the nation’s fastest growth rates. In fact, prior to TABOR government jobs grew slightly more than business or total employment. Since TABOR, business job growth has nearly doubled that of government job growth.
Problems With the Political Process
We cannot trust the political process to carry out this mission. The process itself creates too much pressure to increase spending. New Mexico’s citizens must take control as they did in Colorado. What if New Mexico had done so in 1992? Our state government budget would be $3.4 billion. Compare that to the $4.3 billion budget of today. $932 million would have been returned to the pockets of New Mexico taxpayers. This works out to $491 for every man, woman and child in New Mexico. Thought about another way, this would allow for a reduction of 2.5 percentage points in the New Mexico gross receipts tax. This is only half the story, of course, because the greater economic prosperity unleashed by lower tax rates will also increase incomes.
We are not saying that government can’t grow. We simply want to limit the rate of growth, unless the people give their explicit approval to exceed the limit. Under TABOR, the nominal annual rate of growth of New Mexico’s state government would have been 4.1% for 13 years (1.6% population growth rate plus 2.5% rate of inflation). As it was, government actually grew at 6.0%. Because of compounding over time this small difference has a tremendous impact.
Why can’t we rely on the political process to generate spending control? The reason is simple: The various pressures exerted by spending interests are too great. Consider our experience from 1995 to 2002. New Mexico had a governor who said that if government was reduced by one-third none of the residents of New Mexico would notice. He vetoed over 750 individual pieces of legislation. He was overridden only twice. Several times he vetoed the entire budget bill, threatened to allow government to shut down and regularly played a game of brinkmanship with the legislature.
To say that he held the line on government growth is not adequate to describe the depth of his fiscal discipline. However, even he was only able to hold average annual spending increases to 5% (0.9% greater than TABOR limited increases annually). This equated to a total real per capita spending growth of 7.5% during his eight years in office.
The need for a constitutional amendment in New Mexico is dire. Per capita spending on Medicaid is up 210% over the past 13 years. In public education, per capita spending is up 19%. Despite all the pronouncements that taxes have been cut in the last few years, the reality is quite the opposite. It is true that the personal income tax is on a five-year glide path that will put New Mexico in line with our surrounding states. The bad news is that tax increases enacted over the last two years will offset tax decreases by $70 million in 2004, by $124 million in 2005, and by $106 million in 2006. A quick scan of news headlines reveals that Santa Fe is not prepared to take any steps to control spending. In fact, On September 17, 2004, it was reported that the upcoming Medicaid costs are projected to increase by $100 million over this year’s level.
In a TABOR controlled environment, state government would be forced to deal with the reality that for all the money we throw at various government programs, Medicaid, education and the like, no real improvement has resulted. How much spending is enough?
Given a multi-generation track record of more and more spending, the solution is not money. However, as long as government is unrestrained in its ability to raise tax revenue, real solutions to our most pressing problems will not be found. Further, our economy will be forced to languish under a stifling and ever growing government.
A constitutional amendment would limit the growth of government and thereby enable tax reductions and increased prosperity. The people need to take control.
If we can prevent the government from wasting the labors of the people, under the pretence of taking care of them, they must become happy.
Thomas Jefferson 1802
The gross receipts rate of tax on goods and the top rate on individual income are more in line with other states.
Written by Kelly S. Ward and Harry Messenheimer, PH.D

Santa Fe’s ‘Living Wage’ Misguided

On June 24, a New Mexico District Court judge upheld Santa Fe’s “living wage” law. Businesses and their employees should appeal the judge’s ruling because the law will benefit a few workers but will overwhelm these benefits with costs that others would bear.
Santa Fe’s Living Wage Ordinance was enacted in 2002. It initially applied to city employees, employees of firms with service city contracts of $30,000 or more, and certain recipients of economic development assistance from the city. Now the city council has extended the ordinance to every business in town employing 25 employees or more.
Minimum wages would initially rise to $8.50 an hour, to $9.50 an hour in January 2006, and $10.50 in January 2008. For comparison, note that the federal law sets a minimum wage of $5.15 an hour, or $2.13 an hour for tipped employees. By contrast, the Santa Fe ordinance would boost the minimum wage for tipped employees to $5.50. Most of the unskilled workers in Santa Fe are in hotels, restaurants, shops, supermarkets and grocery stores.
The major negative impact of minimum wage laws is unemployment among unskilled workers – mainly teenagers, women and minorities – leading to heavy economic losses to these groups. This has been documented many times for minimum wage laws at the national level.
These impacts are likely to be even greater for small towns that enact “living wage” laws because many firms can avoid the extra labor cost simply by moving to another town. Two factors will cause unemployment among the unskilled workers to rise:
  • First, the substitution between labor and capital. Faced with a higher minimum wage rate, employers would invest in less labor-intensive machinery that would enable them to hire more-skilled workers at the expense of less-skilled workers.
  • Second, the rise in the price of services rendered by the affected industries would drive up prices, thus inducing consumers to purchase less – resulting in worker layoffs. For example, higher prices charged by hotels would induce some opera fans to return to Albuquerque rather than spend the night in Santa Fe after the opera. Some number of tourists from around the country would change their plans too.
The smallest businesses aren’t covered by the new law, but some of those in the 25 to 100-employee range may not survive. For example, The Marketplace Natural Grocery in Santa Fe has some 80 full-time employees. Of those, the majority are clerks, stockers and baggers who earn less than the proposed “living wage.”
This small store faces competition from chain stores like Whole Foods and Wild Oats that could absorb temporary losses until they invested in labor-saving machinery. For their smaller competitors, the increase in labor costs might be fatal.
There will be other economic disruptions, stemming from poor targeting, that are less visible. For example, some firms might counteract the higher wage by reducing the fringe benefits they offer. Thus, the “living wage” in these cases would have no net benefit to workers. Indeed, since wages are taxable and fringe benefits aren’t, workers might well be made worse off. Other examples of poor targeting are tipped employees and employees from a family of two or more earners.
First, even with a minimum wage of $5.50, a tipped waiter may be earning something like $15 an hour. This tipped employee is likely not poor, just a student who earns some extra money during the summer that would help defray his tuition and room and board while attending college.
Second, poor targeting will increase the incomes of teenagers and unskilled women in two or three-earner families. The worst case scenario is that of a household of two wage-earners, where one member earns $40,000 annually and the other earns $7 an hour. Together they earn $54,560. Raising the minimum wage rate from $7 to $9.50 in 2006 would add $5,200 to their annual income.
The logic of the “living wage” or, more correctly, the mandatory minimum wages, is flawed. Basically, it is the philosophy that a government can force producers to pay employees more than the value of their contribution to production. Economic theory is very straightforward in this issue: If we want to raise the wages of unskilled laborers we should induce them to become more productive by acquiring more schooling and better skills – either on the job or at schools.
Gisser is UNM professor emeritus of economics and a senior fellow at the Rio Grande Foundation. Brown is a research director for the foundation.
Health Care Research

State Health Insurance Plan Should Include the Uninsured

Gov. Bill Richardson promises to try again in 2005 his plan to put some 600,000 public employees and retirees into a single health-insurance purchasing pool. While this plan would create a huge state institution that will not do much, if anything at all, for state and public employees, it does not address some of the serious health care problems we face in New Mexico.

The aims of any down-to-earth health care policy for New Mexico should be first to attract more physicians and other care providers to New Mexico; second to remove the vestigial gross receipt tax on out-of-pocket medical expenditures; and, third, examine the issue of the high rate of the uninsured in New Mexico.

The national rate of uninsured steadily, but slowly, increased from 12.9 percent in 1987 to 16.3 percent in 1998. Then it made a sharp turn and moved downward to 14.2 percent in 2000 and upward to 15.2 percent in 2002. The apparent cycle in recent years is mainly in response to changes in unemployment and health care costs. In the near future, when the unemployment rate will continue to decline, the national rate of uninsured will change course and turn southward. It is too early to make predictions about the long-run trend. In what follows I focus on interstate insurance comparisons.

The proportion of persons without medical insurance in New Mexico is one of the highest in the United States. Indeed, according to the U.S. Census Bureau, 14.6 percent of all Americans were without any insurance in 2001. Iowa , with 7.5 percent, had the lowest rate; Texas, with 23.5 percent had the highest rate; New Mexico, with 20.7 percent was the second highest.

I applied statistical procedures using Census 1999 and 2000 data for all the states for estimating the impact of economic and social variables on the rate of uninsured. First, I found that an increase of average personal income by $1,000 is expected to reduce the rate of the uninsured by 0.45 of one percentage point. Second, a one percentage point increase in the number of Hispanics is expected to result in a rise of one-third of one percentage point of uninsured persons. Third, a one percentage point increase in the ratio of blacks in total population is expected to result in only one-tenth of one percentage point increase in uninsured persons.

Why Hispanics are less likely than non-Hispanic whites to be covered by health insurance is a puzzle. New Mexico should support a study to explore this issue. Additionally, policy-makers should focus on the uninsured who are extremely poor, chronically ill or disabled. For starters, not all uninsured persons deserve subsidized medical care even when they earn low incomes. Consider young adults who just graduated from college. In general, these young adults are relatively more likely to contract HIV, suffer violent injuries in car accidents, and, if they are females, become pregnant. But, between their feeling of invincibility and small bank accounts, graduates shun inexpensive short-term plans.

Or, consider adults who are temporarily unemployed or in job transition and being aware of the de facto subsidized health care for the uninsured, fail to continue insurance by COBRA (Consolidated Omnibus Budget Reconciliation Act). Or, how about those who retire before qualifying for Medicare but decide not to buy an individual health plan because it is surprisingly more expensive than they imagined.

Finally, there are the risk lovers for whom gambling, no matter in what form, is fun. It is likely that the availability of Health Saving Accounts (HSA) signed into law by President Bush in 2003 will induce some of the above to insure themselves: HSA will give them the same tax advantages now granted to mostly all other groups.

But we cannot ignore the truly needy. Medicaid in New Mexico is very generous to children, including medically fragile children, the disabled, the aged who require institutional care and a variety of other needy persons, such as the blind. There is a subgroup, however, of extremely poor, chronically ill, or a combination of the above, adults who are uninsured and do not qualify for Medicaid. As an illustration, consider a single parent- a mother with two children- earning $20,000, or a married couple earning $20,000 in which one spouse is chronically ill. Instead of rushing to embrace a grandiose plan creating a huge pool for state and local government employees, our elected leaders should focus on the extremely poor and chronically ill. We need a solid economic study, based on a fresh survey of uninsured persons in New Mexico. Such a survey should sort the uninsured not only by the traditional explanatory factors- income, ethnicity, age and education- but also by Medicaid eligibility, unemployment status, job transition, recent graduation from college, being chronically ill and so on. The order of magnitude of the number of the truly needy among the uninsured is essential before any sound policy regarding the medically uninsured can be considered.


A Statistical Estimate of the Average Number of Physicians per 100,000 Residents in 1998 as a Linear Function of Personal Income, Medicare Expenditures per Enrollee and Medicaid Expenditures Per Recipient and per Capita


Regression 1

Constant Personal Income1998

Medicare Expenditures per Enrollee2000 Medicaid Expenditures per Recipient2000

Medicaid Expenditures per Capita2000 Adjusted R2
Coefficient -233.89 0.009 0.037 0.011   0.68
t-ratio -4.8 4.2 5.8 1.5    
Regression 2
Coefficient -203.19 0.009 0.023  



t-ratio -5.11 5.6 3.9   5.35  

A Statistical Estimate of the Percentage Uninsured as a Linear Function of Personal Income, Hispanic and Black as Percents of Total Population, Educational Attainment and age

The Data are for 51 States


Constant Personal Income 1999 Persons of Hispanic or Latino Origin as Percent of Total Population2000 Black or African American as Percent of Total Population2000 Educational Attainment2000* People 18 to 24 Years Old: Percent of Total Population2000 Adjusted R2
Coefficient 18.08 -0.00045 0.33 0.106 0.072 -0.291 0.58
t-ratio 1.9 -4.2 7.3 2.5 0.6 -0.76

Health Care

Health Savings Accounts Cure Patients of Blind Consumption


abq_journalThose who advocate the nationalization of the American health-care system often cite the trend of rising national health expenditures as percentage of gross domestic product. From 1960 to 2000, health care’s share of GDP in the United States increased from 5.3 percent to 13.2 percent. Rising personal income, higher quality care and insurance that insulates individuals from health care’s real costs are the main factors behind this trend. From 1960 to 2000 real GDP per capita, has increased from $13,155 to $32,670 (expressed in 1996 prices). During the same period, real GDP per capita devoted to non-medical services increased from $12,458 to $28,3588. Put differently, the so-called explosion in medical-care expenditures reduced the average annual rate of growth of real GDP per capita devoted to non-medical goods from a potential 2.30 percent to 2.08 percent.

American consumers are wealthier than ever: The more than doubling over four decades of real GDP per capita excluding medical expenditures is reflected in real consumption. The “explosion” in medical-care expenditures ate a bite of our salad, but hardly the whole lunch. And for that increase in health spending, we receive better high-tech care that was not available at any price in 1960.

In that light, the present looks pretty good. The future looks even better, mainly due to the surge of American productivity and the Health Savings Account Act that President Bush signed into law in 2003.

Traditional medical insurance covers two dissimilar events: minor ailments and catastrophic illnesses. If a consumer faces a 5 percent probability that she will contact a catastrophic illness in a given year requiring $20,000 of medical care, she would be willing to purchase a policy for $1,000 (plus transaction costs). She will not use more of the heart-surgeon’s services just because her out of pocket spending is zero.

This consumer also faces some probability of suffering the run-of-the-mill headaches, sniffles, backaches etc. Assume that she would be willing to purchase a policy for additional $1,000 for sniffles, etc. Under the tax law she is allowed to exclude $2,000 from her taxable income. Her demand for care for minor illnesses is inversely related to price: At the true high price she would consult the medical encyclopedia and use over-the-counter drugs. At a low price- zero if her insurance pays the entire cost- she would consume much more care.

The problem with the prevailing medical insurance is that the third-party payment of health care bills insulates the consumer from the real costs of medical care services for non-catastrophic illnesses.

The new Health Savings Account law basically allows the consumer in our example to set aside $1,000 in an HSA that is tax exempt, and can be used for sniffles and headaches at her discretion. If this year she spent only $300, she can use the remaining $700 for next year’s sniffles, or save it for retirement.

HSAs thus eliminate “moral hazard” by separating catastrophic from minor illnesses and injuries. Additionally, it is designed to enhance competition by eliminating managed-care-third-party restrictions. It is also likely that availability of HSAs would induce many of the uninsured to insure.

Furthermore, under the HSA law, it behooves our individual to convert a high-cost-$2,000 premium, low-deductible policy into a low-cost-$1,000 premium, high-deductible policy. Before the HSA option was enacted, such a transition would have resulted in a loss; turning the $1,000 premium saving into taxable income would have resulted in a loss of roughly 40 percent (income and payroll taxes.) But now, the individual can use the sum of $1,000 to fund a health savings account, and the contribution to this account will be fully deductible, whether she itemizes deductions or not.

Because of the contribution of the new HSA law to competition and efficiency, the next four decades look even brighter than the previous four.

There are two additional legislative modifications that should be initiated at the federal level in order to further reduce the future costs of medical care:

  • Congress should change the Medicaid formula for matching state funds to making block grants. With block grants, states will have stronger political incentives to distribute Medicaid money more efficiently.
  • In July 2003, the U.S. Senate could not muster the 60 votes needed to pass the medical liability reform to cap medical malpractice damage awards. They should try again, because such a reform would go a long way to reduce the cost of physicians’ services all over the United States.

The New Mexico Legislature removed the gross-receipts tax on payments to physicians from commercial managed care companies. But, the gross-receipts tax will continue to be imposed on the kind of out-of-pocket medical expenditures that would be made from health savings accounts. The 2005 Legislature should remove that vestigial gross receipts tax, an act that will make HSAs more attractive to consumers and help attract more physicians to New Mexico.


Let New Mexican Business In On Tax Breaks

New Mexico tries to lure new businesses into the state with a menu of financial incentives. The state offers tax breaks galore, loans, equity investment, and more. Forty-seven different incentive programs, according to the Economic Development Department.
But does this approach work? I certainly have my doubts, and I don’t believe that anyone can prove that it has any substantial benefit.
Business-luring policies are widespread. All 50 states and thousands of cities and counties give location incentives to firms that might “create jobs.” But these efforts are seldom evaluated, and what evaluations as exist tend to ignore such central questions as how long the jobs last.
I’d like to see a rigorous study of New Mexico’s benefit-cost record in attracting industries, but none is likely to appear. More likely, we’ll see claims of success whenever an out-of-state firm accepts a tax break and, coincidentally, moves here.
The first problem with subsidizing selected companies is that governmental operatives are assumed to know more about prospects of targeted firms than do private investors, and this is hard to believe.
Recently the state planned to spend $15 million buying into Mesa, which took over the closing Phillips semiconductor plant. Given the chancy nature of the semiconductor industry and the almost complete lack of interest by private capital, this was a high risk long shot. Fortunately, taxpayers were saved from probable losses when the lone private investor pulled out and the state blanched at the prospect of putting up even more money. But it was a close call.
One well might question whether such ventures are even “investments” in the usual sense of the word. If I invest in GM stock, I always have the option of selling my shares. But when the state “invests” in some venture, it’s stuck for good; rarely does the state ever sell its interest in the company it’s put money into.
Another problem with targeted tax breaks is that the state is driven into supporting risky ventures. There’s no point in investing in sound companies, because they would do fine anyway.
The target, therefore, must be the marginal firm, the one that needs just that extra jolt of help from the state. But these are precisely the companies that are teetering on the brink of failure. Either that or they are so mobile (like call centers, for example) that before long they will succumb to the enticements of some other state.
Third, much of the benefit goes to currently out-of-state businesses and job seekers. We shouldn’t be running a charity for discontented Texans and Californians. Some New Mexicans will get jobs when an out-of-state business move in, but that is offset by higher tax bills for those of us funding this largess.
Finally, most prospective newcomers will insist upon tax breaks, even if they don’t really need them. Identifying such pretenders is doubtful.
Some of this lure-a-company policy is reasonable. Advertising New Mexico’s business advantages makes sense (although plastering Times Square with a huge picture of the governor was a bit much). The state’s web site does a good job of outlining our tax structure and gives a glowing depiction of New Mexico’s business climate. It features the planned reductions of top marginal income tax rates, while discretely avoiding mention of recent increases in several excise taxes. .
But it’s one thing to advertise the current climate for business, and quite another to guarantee against tax increases in the future. Companies will look past the immediate inducements and size up the prospects for taxation five or ten years in the future. In New Mexico, this is worrisome at best, with unresolved budget pressures (from Medicaid, for example) and tax increases looming.
The best way to promote business confidence in New Mexico would be with a constitutional amendment holding future state spending growth rates to the sum of population growth and inflation. We should copy Colorado’s “Taxpayers Bill of Rights,” which has brought a marvelous improvement in that state’s economy.
Lower taxes across the board, not just for newcomers, and the promise of stable, reasonable taxes in the future, will do more for the state’s economic development than targeted incentives.
Health Care

Medicare Needs a More Logical Formula

The number of physicians per capita is a major indicator of quality and quantity of health care services available in New Mexico, or anywhere. This ratio is a function of money available to pay physicians.
A: The short run. The only provision in the (recent) tax bill proposals that makes economic sense is to rescind the gross receipts tax (GRT) paid by medical care providers. The report by the New Mexico Health Policy Commission, “Physician Supply in New Mexico: 2002,” concluded that the main factor contributing to physicians leaving New Mexico is GRT. Consider a physician who grossed $350,000 a year, of which $100,000 from Medicare and Medicaid is not subject to GRT. After paying all expenses, the physician nets $150,000 income before taxes. Rescinding the GRT (5.8125 percent) would net the physician an additional $14,531- almost 10 percent of net income before taxes. Obviously, the relief from abolishing GRT on medical providers will be shared by both doctors and patients, but the lion’s share will benefit the doctors. The GRT is a good tax, and except for the doctors’ and hospitals’ bills it should be retained. In particular, grocery tax on food should be retained.
B: The long run. According to the U.S. Census Bureau, in 1998 the average number of physicians per 100,000 resident population in the United States was 251. For New Mexico this figure was 212. Is the physician shortage in New Mexico severe? The ratio for Massachusetts was 412. If we sort the 51 states (including D.C.) by a descending order, New Mexico is No. 32. Idaho, with a ratio of 154, has the most severe shortage.
Calculations based on the Census Bureau reports show that in 2000 the average Medicare expenditures per enrollee nationwide was $5,578. The highest level was $10,316 in D.C. The second highest was Louisiana with $7,342, and the lowest figure was $3,053 in Iowa. In New Mexico, the fourth state from the bottom, the average Medicare expenditures per enrollee amounted to only $3,729.
Getting New Mexico a little closer to the national average, say by increasing its Medicare allocation by 20 percent, roughly to $4,500 per enrollee, would increase the number of physicians by 17- from 212 to 229 physicians per 100,000 residents.
Obviously, the archaic formula used in the process of allocating Medicare money is senseless and disadvantageous to New Mexico. A basic economic principle tells us that, on average, in a free labor market, incomes of physicians (and nurses, etc.) across the U.S. would be proportional to the cost of living. For example, if the cost of living in California is 10 percent higher than in New Mexico, we should expect neurosurgeons to earn 10 percent more (in nominal terms) in California relative to New Mexico.
To illustrate the arbitrariness of the federal allocation of Medicare money, I compare two states, Texas and New Mexico. The accompanying comparison illustrates my point:
Texas and New Mexico: A Comparison Based on ACCRA
• Medicare expenditures per enrollee: 2000
$3,729 in New Mexico
$6,540 in Texas
• ACCRA cost of living: 2002, four-quarter average
103.7 in Albuquerque
91.9 in Houston
The cost of living in Albuquerque is 10 percent higher than in Houston. Yet, in 2000, Texas was allocated 75 percent more Medicare money per enrollee than New Mexico. This is ludicrous. States like Iowa, Vermont, Maine and New Mexico that come up on the short end of the stick should band together and form a political coalition for the purpose of revamping the allocation of Medicare money. To this end they must have a cross-sectional price index that would calculate the cost of living for each of the 51 states. There is no reason why the experienced Bureau of Labor Statistics could not undertake to perform this task.
Our congressional delegation should lead the battle for a logical distribution of Medicare money by first convincing their colleagues to legislate the creation of a cross-sectional Consumer Price Index. The distribution of Medicare money to enrollees should be determined solely by a cross-sectional price index.
We should note that New Mexico legislators deserve credit where the U.S. Senate failed. New Mexico law caps punitive and economic damages at $600,000. (See “Better Than Most” by Winthrop Quigley, Business Outlook, Albuquerque Journal, June 26, 2003). However, the fact that New Mexico offers physicians cheaper malpractice insurance than most of the country is not enough to overcome physician shortages.
Economy Research Tax and Budget

Reform This! Coherent Tax Strategies for New Mexico

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.
Click here to download the entire report in PDF format.
Economy Energy and Environment

Economic Aspects of Water in New Mexico

The water crisis in New Mexico is overblown. We actually have a reasonably lively water market, and it is superior to those in most states. Professor Micha Gisser discusses the development of our water rights, impediments to improving them and ways we might reduce those impediments. Micha Gisser is senior fellow at the Rio Grande Foundation and Professor Emeritus of Economics at University of New Mexico. He has written extensively on energy and natural resource economics.

a. The Water Market in New Mexico

It is unfortunate that during the drought we suffer from inordinate attention from politicians and laymen given to a “water crisis” that does not exist. In what follows I attempt to first show that we have a sound water system in New Mexico which is based on water markets in which private water rights are traded, and, second, to shed light on some of our problems that are basically minor.

New Mexico has superior water rights when compared to all other states in the Southwest United States. During most of the 20th century, farmers, manufacturers, miners and municipalities have traded thousands of water rights in a lively market. Economic growth will undoubtedly intensify the future demand for water. Since water is a scarce resource, the “bad” news is that with a relatively fixed water supply facing New Mexico, water prices have only one way to go-up. The “good” news is that users can easily incorporate the trend of rising water prices in their benefit-cost calculations and adjust accordingly. While water is scarce as indicated by its rising price, there is no way government could legislate away the scarcity.
The prior appropriation doctrine was adopted by New Mexico when the state enacted the Surface-Water Code in 1907. The Surface-Water Code permits an appropriator to sell his surface-water rights, quantified by consumptive use, in whole or in part, and apart from his land, to any user provided the use is not detrimental to existing water rights in the stream. For example, a user upstream may attempt to purchase water rights from a user downstream. Such a transaction may be detrimental to a third user located between the two users. Twenty four years later, in 1931, the legislature of New Mexico enacted the New Mexico Underground Water Law, which adapted the state’s surface-water law to groundwater. The groundwater law restricts users by imposing an annual aggregate consumptive water use. If the aquifer is fully appropriated, potential users may only acquire water rights by purchasing existing rights. The State Engineer has jurisdiction over all surface waters and groundwater in declared underground basins. In New Mexico, an appropriator desiring to sell a water right must make formal application to the State Engineer. The State Engineer approves the application for transfer provided it is not a detriment to existing rights. Consumptive use is the measure of the transferable right, and hence both diversion and return flows are closely monitored by the State Engineer. For example, A, with a return-flow-coefficient of 0.5 can sell B with a return-flow-coefficient of 0.75, fifty acre feet of consumptive use according to the following rule:

100 acre-feet(1 – 0.5) = 200acre-feet(1 – 0.75)

Implying that A decreases his diversion by 100 acre feet, and B increases her diversion by 200 acre feet. Interestingly, basing water rights on consumptive use is efficient from the standpoint of economic theory. Users are guided by the price of water, which indicates its scarcity. When they voluntarily exchange rights in the market, water tends to flow towards the highest value use. This promotes conservation and economical use of water.

b. Adjudication

Adjudication is a legal process of determining the relative priority dates of water rights, and their quantification. Seniority gives the user a better priority. Quantification is an on going process, mainly because it is based on the farm practices of the day. For example, in the late 1940s and early 1950s, in the Ogallala, farm land was adjudicated consumptive-use water rights at a rate of 2.5 acre feet per acre and a return-flow coefficient of 1/6. Later, the State Engineer raised the adjudicated consumptive use to 3 acre feet per acre and the return-flow coefficient to 1/3. The adjudication of Pueblos’ water rights is another relevant illustration: In the wake of the New Mexico v. Aamodt (1976), the Tenth Court of Appeals speculated that, on one hand, the United States gave the Pueblos a quitclaim deed to lands recognized by the Treaty of Guadalupe Hidalgo, but, on the other hand, that the Pueblos may have reserved Winters rights. Either way, the Pueblos probably have the most senior rights in New Mexico. Since on the issue of quantification the court failed to provide any clear answer, the Pueblos filed their claims at various district courts, and the adjudication cases are still pending. Obviously there is a backlog of adjudication cases waiting their turn in the district courts. Our courts are over loaded with a backlog of water cases, and they could use additional judges, mediators and clerks. But a Water Court should be created only if a further study could demonstrate that a Water Court is the best way to handle the current backlog.

c. Domestic Wells

Owners of existing domestic wells pump water whose legality derives from a permit issued by the State Engineer. In the past, this procedure was justified by the smallness of the fraction of domestic wells in total water depletion. With the rapid economic growth leading to intensification in the demand for water, owners of domestic wells tend to treat water as a free good. They should be treated like all other users of the scarce water in New Mexico. Owners of existing domestic wells should be assigned water rights based on past use, say five-years average, so that they incorporate its price into their personal calculus of how much to use, trade or conserve.
The water law should also be amended to require persons who intend to become owners of domestic wells to purchase existing water rights from other users, subject to the rules and regulations as promulgated by the State Engineer. The water law should be amended to require that all owners install in their domestic wells water meters acceptable to the State Engineer, for the purpose of monitoring their annual use.

d. Use it or Lose it

The current “use it or lose it” provision in New Mexico’s water law doe not make any economic sense, because it leads to wastefulness, and it should be eliminated. An owner of water rights who for some economic reason cannot use his or her water today, but expects to resume using it in the future, should be allowed to maintain ownership. He or she should be able to either rent the water to other users, or simply curtail using it in the short run and resume using it whenever he or she pleases. The idea of “water banks” is welcome but may not always work: As an illustration, it will work if by reducing the pumping of groundwater by 100 acre feet, the associated aquifer would be enriched by the same amount (adjusted by consumptive use consideration). It will not work in the case of surface-water, unless the owner has access to a reservoir, like Albuquerque.

e. Relationships With Contiguous States and Mexico

I. Background Information. In New Mexico water rights are well defined based on consumptive use, and are traded efficiently in a lively market. Unfortunately, however, The market for water, however, stops at the border. Contiguous states have different water laws, and their water rights are defined differently. Private water rights are traded neither between Mexicans and New Mexicans, nor among users in New Mexico and users in the contiguous states. The surface water of the two major international rivers, the Rio Grande and the Colorado River are apportioned by treaties. In 1906, the U.S. and Mexico signed a treaty that committed the U.S. To deliver to Mexico 60,000 acre-feet annually from the Elephant Butte Dam. The Elephant Butte Reservoir was constructed at the time for storage and regulation of the Rio Grande so that the terms of the treaty could be met. In 1944 the two countries entered another treaty that (a) guarantees to Mexico 1,500,000 acre-feet per annum from the Colorado River and (b) apportions equally between the two countries the surface waters of the Rio Grande between Fort Quitman and the Gulf of Mexico.

Surface water is apportioned among states within the U.S. by compacts that in essence are like international treaties. Some seven compacts were signed between New Mexico and contiguous states. Here we mention only the most important four compacts:

The 1922 Colorado River Compact (approved by a presidential proclamation in 1929) divided equally the Colorado River’s water between the upper basin states – Utah, Wyoming, Colorado and New Mexico – and the lower basin states – California, Nevada and Arizona.

The 1938 the Rio Grande Compact signed by New Mexico, Colorado and Texas (approved by Congress in 1939.) This compact produced water-delivery agreements from Colorado to New Mexico and from New Mexico to Texas.

The Upper Colorado River Basin Compact of 1948 (approved by Congress in 1949), apportioned a fraction of the Colorado River water among Colorado (51.75%), Wyoming (14%), Utah (23%), Arizona (50,000 acre-feet) and New Mexico (11.25%). This compact eventually produced the Navajo Dam and the San Juan-Chama Diversion Project.
The Pecos River Compact was signed by New Mexico and Texas in 1948 and approved by Congress in 1949. The compact was intended to provide for the equitable division and apportionment of the use of the Pecos River’s water between the two states and secure and protect existing developments within the states. In particular the compact guaranteed for Texas a quantity of water available to it under the 1947 conditions. Following the 1974 Texas complaint submitted to the U.S. Supreme Court, the Pecos River Compact was revised.

Water laws prevailing in the Southwest vary from state to state. To eliminate the impediments to inter-state tradable water rights, contiguous states must adopt a uniform water law, and allow private sales of water rights across state borders. The following section illustrates how users in both New Mexico and Texas lost an opportunity to increase their water supply, respectively, for 150 years.

II. Particular Problems with Texas. Once, when New Mexico had a realistic chance to enhance its water supply, bureaucrats and politicians squandered it. In the late 1980s El Paso, a border city in Texas, submitted applications to drill 266 wells in the Mesilla Bolson and 60 wells in the Hueco Bolson, both in New Mexico. The bolsons are huge mines of water, and hydrologists had argued that El Paso’s return flows back to the Rio Grande would more than offset the pumping effects on the river, for 150 years. The project would have provided additional water to El Paso and New Mexico. Since El Paso is on the “wrong” side of the border, New Mexico resisted, and the project was lost in a lengthy legislative and legal process. Later, Texas returned the favor. In 1974 Texas filed a complaint against New Mexico in the U.S. Supreme Court. Texas alleged that New Mexico had breached the Pecos Compact during the period extending from 1950 to 1972 by depleting stateline flows by 1.2 million acre feet of water more than the compact allowed. New Mexico lost the case, had to compensate Texas to the tune of $14 million and had to accept an unfavorable restrictive delivery obligation. Since our water market stops at the border with Texas, only interstate negotiations can resolve this conflict. With a considerable political effort and luck, the two states could work out a compromise that would enhance the supply of water available to both states by reviving the El Paso project in exchange for updating the Pecos formula based on hydrological data that has accumulated since 1947. If we want to reduce the flow of Pecos water to the Red Bluff Reservoir, we should let Texas pump water from the Mesilla and Hueco Bolsons. In the long run, the users in the two contiguous states would benefit greatly from adopting a uniform water law and adopting free water rights trade.

f. Schemes to Enhance Water Supply

Schemes to enhance water supply may represent economic boondoggles. In the early 1980s, a study commissioned by the High Plains Study Council elaborated on a proposal to recharge the Ogallala aquifer by hauling water to the High Plains from distant rivers. The expected cost of importing one acre foot was in the range of $226 to $569. It did not bother those who produced the report that the net value of crops produced on an acre in Lea County would be less than the cost of importing water to irrigate that acre. For example, salt cedars, originated in parts of Eurasia and China, have been blamed for water quantity and quality problems. The roots of salt cedars stretch out in order to find water, and consequently they dry up aquifers and lower water tables. The evapotranspiration rates of salt cedars by far exceed those of native species-cottonwood, willow and arrowweed. Proposals to remove salt cedars in order to enhance our water supply should be studied. Unless a comprehensive and serious study can demonstrate that the economic benefits of salt cedars removal exceed the economic costs, a project of salt cedars removal should be dismissed. In other words, we should investigate whether the net value of crops produced on an acre in some valley along the Rio Grande would exceed the cost of removing salt cedars to free up the water required to irrigate that acre.

g. Municipal Water and Mandated Conservation

In an ideal market many consumers would buy water in the marketplace from many producers, subject to perfect water laws. Because of the complex hydrologic aspects of water grids in densely populated areas, as well as the large scale economies of treatment plants, municipal water systems, like local telephone providers, are natural monopolies. Under these conditions an enlightened municipality should set the price of water equal to the marginal cost of pumping and delivering plus the annualized cost of water rights. If at such a price a municipality has an excess supply over the quantity demanded, it could either store, rent to others or sell some of its water rights. Alternatively, given a water shortage, it could either store, rent from others or purchase some water rights on the open market. Normally, economic growth leads to municipal demand intensification and politicians, instead of purchasing water rights from farmers, tend ride on popular tides generated by water conservation advocates.

We should resist social engineering , e.g. proposing a comprehensive conservation efforts that will outline specific plans to install efficient plumbing fixtures in our bathrooms and invest in low water-use landscaping in our backyards. Such conservation mandates result in economic losses. Suppose, to use an illustration from simple Economics, that a mandated replacement of your current lush landscaping by xeriscaping would save you $150 worth of annual lawn watering. Assuming an investment of $5,000 in xeriscaping. Then, at an interest rate of 4 percent and a life of 20 years, it will cost you annually $368-a net loss of $218. Moreover, you value the elegance of xeriscaping relative to the charm of lush landscaping at less than $218: otherwise mandated conservation would be superfluous for you. Note finally that public water use accounts for a minute fraction of the total water depletion in New Mexico. The abundance of water use in agriculture indicates that a small transfer of water from agriculture to municipalities will sustain economic growth in our cities at a lower price increase far into the future.

h. Instream Flows

New Mexico’s water law is imperfect in that it does not recognize rights to instream flows. The demand for instream flows is derived from various recreation activities. The problem has become acute in recent years because the demand for instream flows has intensified with a rising standard of living, and also the need to protect the endangered Silvery Minnow. When drought conditions are mild, opportunities exist to manage the water in upstream reservoirs to help the Silvery Minnow without thrusting the entire burden on a singled-out group of irrigators. This may not be the case in low-flow years. Whether or not we accept the endangered-species philosophy, we should resist putting the burden of protecting the Silvery Minnow on a singled-out group of irrigators, or other groups of users. One possible solution is to upgrade the water law in New Mexico to allow a limited state acquisition of water rights on the open market for the purpose of enhancing stream flows during drought years. In high-flow years, the state could either store its water, or rent it to private users.

Another solution would be for the state government, or better the federal government, to purchase from water users low-flow options on the open market. A low-flow options for one acre-foot is a legal contract requiring the participating water user to diminish his or her diversion from the stream (Rio Grande) by one acre foot when the snow pack in March is below a level which is specified by the option contract.

Local Government

Let’s Make the Speediest Internet Access Available to Everyone in New Mexico

Right now the fastest and easiest way to connect to the Internet, the so-called “broadband spectrum,” is only available via cable or digital subscriber line (DSL) to those who populate the largest cities. Wouldn’t it be nice if rural areas could use the technology too? All that’s needed is a pizza sized satellite dish and a company willing and able to provide broadband service at a reasonable price. Unfortunately, if a coalition of lobbyists has its way, rural areas may never see broadband. Rupert Murdoch’s News Corporation and its allies are currently petitioning the Justice Department and the Federal Communications Commission to stop a merger that would finally bring those satellite dishes at a reasonable price to the countryside.

Maybe you have not yet heard much about broadband.  Unlike conventional phone-line connections, broadband is always on. It is also faster and more reliable than dial-up services. It can deliver voice, video and data across the globe.

Broadband has great potential in rural areas:

  • Farmers can use it to monitor field-specific conditions such as weather. They can also use it to keep abreast of pest alerts, prescriptive irrigation schedules and new crop models.
  • Now physically isolated from medical care, rural New Mexicans might one-day benefit from a budding telemedicine industry. Chronic conditions might be monitored from hundreds of miles away and diagnoses might be made without a visit to a doctor’s office.
  • Students also stand to gain. There are currently a number of interactive education programs available on broadband television.  Students can take courses in English as a second language, earn a graduation equivalency degree, or even receive college credit.
  • Perhaps the biggest benefit to rural users is the entrepreneurial uses not yet developed, uses that will help our rural areas prosper.

The problem is that these benefits and others may not be realized. For two years, the New Mexico Corporation Commission kept US West’s DSL lines out of New Mexico while connections were being set up in other states. The Commission refused to let US West in until it relinquished what the company saw as proprietary information. In December of 1999, the state finally relented, and DSL construction was soon underway.

Qwest has since bought US West. They and a number of other firms are now slowly making their way into the New Mexico market.  Understandably, it is logistically difficult and at times prohibitively expensive to run DSL lines to the far reaches of the state. That is why, nationwide, broadband is only available in five percent of rural communities. Since regulators delayed New Mexico’s deployment considerably, it is likely that far less than five percent of the state’s rural poor have the technology.

That is where satellite broadband comes in. Orbiting high above, satellites can theoretically beam broadband anywhere in the country. They don’t, however, because of an unfortunate combination of economic reality and political machination. The satellite industry is a perfect example of what economists call an imperfect market. Its cost structure is dominated by large fixed costs – that is, expenses incurred whether or not the firm actually churns out a product. In this industry, it costs millions to buy up broadband licenses and send a satellite into space. Once up, the marginal cost – that is, the expense of bringing the service into another home – is literally pennies. Because competitive firms must price at marginal cost, the satellite industry would not survive if it were perfectly competitive. Pennies simply won’t launch satellites. But if allowed to consolidate their efforts, firms can share the costly satellites and pool their broadband licenses. By joining up, these companies can serve people who otherwise would go without.  Economists call that efficient. Consumers call it service.

As it happens, the nation’s two major digital satellite television providers, EchoStar Communications and Hughes Electronics want to merge. They currently run the DISH Network and DIRECTV, respectively. But given their cost structures, they can only provide local network channels in one New Mexico market, Albuquerque. If merged, however, they can go from serving 42 television markets nationwide to all 210.

But just as New Mexico regulators once stood in the way of DSL lines, some want the Federal Communications Commission to thwart satellite broadband. Rupert Murdoch’s News Corp. sells programming like Fox News and FX to both cable and satellite operators. He worries that a merged buyer will have a stronger negotiating position than two buyers. Consumers, however, should not share his concern.  What Rupert Murdoch is worried about is losing his own market power, he isn’t worried about rural New Mexico’ economic development.

From the viewer’s perspective, the fundamental products are paid television and Internet service. Both are available through a number of other competitive sources so concerns about market power are mostly unwarranted. Since the companies have promised to price uniformly, rural users will benefit from this urban competition. The truth is that over a million New Mexicans outside the greater Albuquerque area stand to gain from the merger. These are people who, on average, make less than 70 percent of the typical Duke City resident’s salary.  They stand to gain from an open market. Let’s hope that Federal regulators listen to them and not Mr. Murdoch. If New Mexico officials were able to come to their senses, surely Federal regulators will.

Constitution and Criminal Justice Local Government Research Tax and Budget

The Pros of Privately-Housed Cons: New Evidence on the Cost Savings of Private Prisons

Rio Grande Foundation finds that private prisons mean big cost savings. New Mexico is in the vanguard of prison reform.
The Rio Grande Foundation has released a new study comparing the per-prisoner costs of incarceration across 46 states. Research economist Matthew Mitchell used regression analysis to isolate the factors that affect per-prisoner department of corrections spending.
He found that states with a large percentage of prisoners in private custody spent less per-prisoner than other states. States like New Mexico, for example, with forty-five percent of their prisoners under private management, spent $9,660 less per-prisoner in 2001 than non-privatized states. Given New Mexico’s prison population, that is an annual savings of over $50 million.
Other factors being equal, an increase in privately-housed prisoners was found to lower per-prisoner costs markedly. On average, states with five percent of their prisoners in private custody spent 14 percent less per-prisoner than non-privatized states. States with forty-five percent privatization, meanwhile, spent 32 percent less per-prisoner than non-privatized states.
New Mexico was one of the first states to privatize its prisons and has a higher percentage of prisoners in private custody than any other state in the union.
Mitchell’s study takes its place among a growing body of studies suggesting that private prisons are both cheaper and safer than public prisons.
Though not the focus of his research, Mitchell also found that states that enjoy right to work legislation spent $9,365 less per-prisoner in 2001 than states without such legislation. The evidence seems to suggest that if New Mexico joined the 22 other states with right to work laws, it would reduce per-prisoner spending even more.
Click here to download the full report in PDF format.