Category: Issues

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Economy

Government Should Not Set Wages

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Hope must spring eternal! Despite the universal failures of socialist regimes, lefties continue to mouth the siren song of economic salvation by the government.
Albuquerque City Councilor Martin Heinrich has joined the choir. He wants Albuquerque to follow in the ruinous footsteps of Santa Fe with an elevated minimum wage law. Heinrich is pretty much a piker, though. His Fair Wage proposal would set the minimum at “only” $7.15 per hour, while Santa Fe’s so-called “living wage” is already $8.50 and slated to grow to $10.50.
This being such a terrific idea, why not $50?
You have to give the left an “A” for spin. “Living wage” is as warm and fuzzy as motherhood and apple pie.
Then follow with an “F” for economics.
With each passing day, communities in the United States find themselves in greater competition with each other, and with other countries’ economies. One doesn’t need Econ. 101 to understand that a rational employer will do whatever it must to avoid paying more than a particular job contributes to whatever the employer is selling in a competitive market. This cost avoidance can include automation, out-sourcing, moving to a less anti-competitive location and myriad other strategies.
When a community like Santa Fe – well known for elitism from the get-go – adopts a super minimum wage, it telegraphs to everyone its decision that lower-paying jobs are simply unwelcome. That leaves nearly unemployable the young, who are eager for career starts, and others who are simply unskilled.
Sure, a hotel, restaurant or retailer wanting to sell in the Santa Fe market has to bite the bullet and pay, but the result must be higher prices with the risk of driving customers away.
Or the result could be driving customers ever more into labor-efficient operations like Wal-Mart. More on that below.
Some considerations go beyond labor cost. One employer recently moved his business from Santa Fe to Pueblo, Colorado. When asked if the “living wage” law were the cause, he replied, “Not directly … but I don’t want someone coming in and telling me how to run my business.” I know from personal experience in Santa Fe that his wasn’t the first to leave for exactly the same reason, and no one will ever know how many businesses refused to consider Santa Fe on this account.
One morning last October, I debated “living wage” with former Albuquerque District Court Judge Anne Kass. Supporting her anti-capitalistic view of the world – in debate and a subsequent column – Kass went all the way back to slavery, then fast-forwarded to an unnamed family in Arkansas that “has amassed a shocking fortune … the old-fashioned, American way – by exploiting workers …”
That would be the family of Sam Walton, who invented Wal-Mart. Kass’ spin appeals to the typical knee-jerk liberal, but in fact she ineptly picked a stunningly inapt example to support her case.
For one thing, Wal-Mart employees already do exceptionally well when compared with others employed in retailing.
For another, Wal-Mart’s sales per employee are astronomical. It can pretty easily swallow any increase that might result from a “living wage” law, and happily collect customers driven to it by price hikes other retailers must enact to cover government-mandated labor costs.
Lastly, I can think of no business that should be less a target of the left than Wal-Mart. Name a single business anywhere that has made it possible for more people of limited means to live better than has this product of Sam Walton’s genius. Of course his family is wealthy: that’s a highly prized result of business success in free-market economies.
Heinrich’s upbeat statements to the press notwithstanding, a case simply cannot be made that Santa Fe’s “living wage” law has been good for its economy. Now he’s backing off, saying only that “the sky has not fallen.”
Well, a bit of patience on that is warranted. No one claimed the sky would fall in the ten months the law has been in effect. Further, anyone acquainted with Santa Fe’s economy for at least 50 years knows it is not a reasonable test bed for Albuquerque or any other New Mexico community.
An economy remaining at the U.S. bottom has no need of more bleeding-heart meddling.
Categories
Health Care Research Tax and Budget

Treat Sick Tax Policy: First, Undo the Harm from 2004 Legislature

Health care providers have long needed relief from New Mexico’s gross receipts tax. But the 2004 legislative session produced a bad law. It provided unfair relief to those involved in “managed care,” making matters worse for those engaged in traditional fee-for-service care. Moreover, it will result in harm to the economy, hurt the consumer and worsen the health care “crisis.”

Introduction

Health care providers have long needed relief from New Mexico’s gross receipts tax.  But the 2004 legislative session produced a bad law.  While it provides relief to those involved in “managed care,” it makes matters worse for those engaged in traditional fee-for-service care.  Moreover, it will result in harm to the economy, hurt the consumer and worsen the health care “crisis.”  This paper summarizes the need for tax relief.  Then it discusses the results of the law, and why the bad aspects of the law far outweigh the good2.  It concludes with some recommendations that would reduce the harm.

The need for tax relief

New Mexico’s gross receipts tax has imposed an excessive burden on firms providing services.  Health care providers are particularly hard hit by the tax because of high overhead costs, all subject to the tax3.  Since no other state in the region taxes services, the gross receipts tax has induced dentists and doctors to leave New Mexico.  The following table summarizes the adverse situation faced by doctors and dentists in Albuquerque4 relative to Texas had the tax law not changed:

 

Before Tax Law Change
Total Tax Paid by Doctors and Dentists
by Taxable Income in Tax Year 2005		  
(includes federal and state income taxes and effect of the grt in NM)
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $29,292 $37,756 $46,564 $55,373 $64,376 $73,962
Texas Tax $10,800 $15,956 $21,556 $27,156 $33,006 $39,606

You can easily see the incentive for doctors and dentists to leave New Mexico.  For example, a dentist earning taxable income of $160,000 would save over $28,000 in taxes5 simply by moving to Texas!

How the new law changes things

Beginning in 2005 managed care practices will no longer be subject to the tax. Unfortunately, however, traditional care doctors and dentists will see their tax rates go up!  The basic feature6 of “managed care” is that “providers must supply health care services to enrollees on a contract basis.”  However, copays, coinsurance and deductibles are subject to the tax even under managed care contracts.  The following table summarizes the new situation for each group in Albuquerque:

 

After Tax Law Change
Total Tax Paid by Managed Care Doctors and Dentists
by Taxable Income in Tax Year 2005
(includes federal and state income taxes)    
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $16,128 $22,175 $28,639 $35,103 $41,802 $49,206
After Tax Law Change
Total Tax Paid by Fee-For-Service Doctors and Dentists
by Taxable Income in Tax Year 2005
(includes federal and state income taxes and effect of the GRT in NM)
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $30,378 $39,041 $48,043 $57,045 $66,238 $76,004

 

What is wrong with the new law?

  • It is grossly unfair.  Why should the state favor “managed care” over traditional care?  Notice from the table above that “managed care” doctors and dentists pay almost $18,000 less in taxes than traditional care doctors and dentists for taxable income of $160,000.  A dentist or physician engaging in traditional care will have incentive to increase the proportion of her practice fitting the managed care criteria.  To break even net-of-taxes a health care provider must charge 25 percent more for the same procedure under traditional care than she would under managed care.  For example, a dentist filling a tooth for $100 under managed care would have to charge $125 under traditional care.  In each case the dentist would receive roughly $68 net of taxes.  The government simply has no business legislating such favoritism.
  • It penalizes responsible behavior.  New Mexico penalizes people who self-insure or are willing to pay high deductibles, coinsurance or copays?  This is the kind of personal responsibility the government should encourage, not penalize.
  • It will harm the economy.  The one-half percentage point increase in the gross receipts tax rate will affect firms and consumers throughout New Mexico.  Since tax harms tend to go up exponentially, the damage done will be far more than double the roughly 8% increase in the tax7.
  • It harms the consumer.  The greatly expanded proportion of health care delivered under managed care in New Mexico will exacerbate everything that is wrong8 with health care – more government price controls and mandates, encouragement of bad principles of insurance, increasing the incentives of patients to overconsume when somebody else is paying the bill, more decision making by managed care “gatekeepers” (rather than individuals in consultation with their physician or dentist) and much less incentive to take advantage of the new, market-friendly Health Care Savings Accounts.  It is difficult to understand how such a bad law could be passed; perhaps the Medicaid crisis tail (and all its managed care interests and advocates) is now wagging the tax policy dog.  And it may be a not-so-subtle policy shift that gains momentum for socialized health care in New Mexico.
  • It is an administrative nightmare.  The complex law requires additional record keeping to justify the gross receipts tax exemption.  Penalties are substantial for those who make errors.

This bad law should be rescinded in the next legislative session.  And it should be replaced with a law that is fair, consumer friendly, helps the economy and provides tax relief to health care providers.  This can be accomplished by an across the board gross receipts tax rate reduction (my favorite), a tax rate reduction for all services or a tax rate reduction only for health care providers.

  1. An earlier version of this article appeared in the October 2004 edition of the New Mexico Dental Journal.
  2. The law also eliminated the tax on groceries purchased for home consumption, while raising the overall gross receipts tax rate in municipalities by 0.5 percentage points.  The part of the law is terrible too, since it will actually hurt the poor (because the tax increase far outweighs any relief from the tax on groceries).  Interested readers will find a thorough analysis of this abomination in the paper Reform This! on the Foundation’s Web site.  Also, an earlier paper “Lower Taxes Period: the right way to end the tax on food” provides additional analysis and background.
  3. Health care providers have a higher percentage of overhead than do other service providers.  Consequently they suffer more.  The percentage of overhead used for the examples in this paper is 65 percent (source Dr. David Moore 9/8/04).  Tax calculations are for couples filing jointly.
  4. Other jurisdictions (e.g. Santa Fe, Las Cruces, Taos) generally have higher gross receipts tax rates than does Albuquerque, making the adverse situation even worse.
  5. Texas has the most favorable tax climate in the region.  But the health care provider would still save over $22,000 in taxes by moving to a less favorable tax state such as Utah or Oklahoma.  The table assumes that the legislature will not renege on the scheduled reduction of the top rate on individual income to 6.0% (from 6.8% this year).
  6. A detailed discussion of qualifying managed care criteria along with examples can be found in publication FYI-202 on the website of New Mexico Taxation and Revenue Department.
  7. See the Foundation’s publication “Reform This!” for a discussion of how taxes cause harm.
  8. A detailed analysis of this assertion can be found in “Solutions to the Medicaid Crisis in New Mexico” on the Foundations website:www.riograndefoundation.org.
Categories
Economy Energy and Environment Oil & Gas

Economic Aspects of Energy in New Mexico

a. The Issue of Electric-Power Deregulation

PNM successful campaign to pull the plug on the state Legislature’s plan to deregulate electric utilities in 2007 portends nothing but high prices in the long run. Our politicians should study the California’s electricity-crisis case. The California debacle is used by those who favor electricity regulation as a demonstration that free markets are inappropriate for electric-power markets.

At the turn of the 20th century in state after state throughout the country public utility commissions were established with the responsibility to regulate the utilities. The consensus was that public utilities are natural monopolies, and, unless regulated, would charge the public monopolistic prices. Today, at the turn of the 21st century, we challenge the need to regulate electric public utilities for two reasons: First, the technology of wheeling electricity over long distances has improved dramatically: High voltage transmission lines and improved alloys used in their production lowered the transmission costs significantly. Consequently, electric power can be wheeled from the Four Corners Power Plant to California at a relatively very low cost. Second, over the years, economists realized that state regulatory agencies became captives of utilities to the point that regulated prices, even if not set at monopolistic levels, are higher than what alternatively would be competitive prices. In 1995 the country was ready to embrace the open power markets. What happened in California changed everything.

In 1996, the California legislature voted to restructure its electric industry. All retail customers were allowed to buy power from electric service suppliers of their choice. The monopoly of the local California utilities was thus broken and utilities were transformed into middlemen. But, unfortunately, politics of different interest groups played a bigger role in the restructuring process than economic analysis. Consequently there were two fatal flaws in the deregulation plan: First, for stranded costs considerations, retail prices were capped at a level that had been then above the anticipated wholesale price. Second, the utilities were required to acquire power for their customers solely on the spot-wholesale markets. The new market structure became effective in April of 1998.

In the Spring of 2000 Four factors combined to push wholesale prices way above the expected $25/Mwh: (1) demand for electricity intensified due to unanticipated economic growth and unseasonable weather; (2) drought reduced the supply of hydroelectric power; (3) rising natural gas costs increased wholesale prices on the spot market instantly; (4) rising prices of emission credits increased the variable costs of generation. As a result, from the early spring of 2000 to the early summer of 2001, spot wholesale electricity prices soared to unprecedented levels. Since the retail price remained capped, the utilities absorbed the difference and eventually became bankrupt.

At the beginning of summer of 2000 the utilities could have saved Californians money and blackouts by entering into long-term contracts. At that time, the utilities had known that gas prices were expected to rise and the water level behind the dams were expected to recede because of the drought. But, the California regulatory agency, guided by the bogus deregulation of 1996, ignored the requests of the utilities to purchase future electricity at reasonable prices. The electric-power market collapsed, and the state took over purchasing wholesale and selling retail power.

Finally, in June of 2001, the factors that initially caused the crisis reversed course. In particular, the demand for electricity began to abate and natural gas prices were falling across the Unites States. The wholesale prices of electricity returned to a reasonably low level. The crisis passed, but California’s lost billions of dollars in the process and will continue to pay high prices far into the future. It is ironic that out of desperation, at the beginning of 2001, Governor Davis instructed the California Department of Water Resources to negotiate long-term contracts with wholesale suppliers of power. It is likely that, since wholesale prices were still relatively high, he saddled California residents with obligations to pay $40 billion for electric power with a market value of only $20 billion.

The lesson from California to New Mexico: There is no alternative to the discipline of competition in an open market. If, and when, New Mexico decides to deregulate its power market it should take the following steps: (1) break the monopolies of utilities in their respective service areas by allowing users to access electricity from out-of area and out-of-state suppliers of their choice; (2) allow electric-power prices, both wholesale and retail, to move freely, up and down, in the marketplace such that supply and demand are always in balance; (3) allow users to freely choose between buying electricity on the volatile spot market, or, alternatively, enter bilateral long-term stable contracts with power suppliers.

At the end of the day the choice is between the regulated local monopoly with relatively stable but very high prices or a completely deregulated electricity market with more volatile, but, on average, significantly lower prices. Rational users will always prefer the latter.

b. Natural Resources

New Mexico is rich in natural resources: It ranks 13th in the production of coal (third in reserves) and third in the production of natural gas (second in reserves). It exports almost half of its generated electricity, over 80 percent of its natural gas and 40 percent of its coal. Both natural gas and coal are sold on very competitive markets. Our policy recommendation is simply to leave the decisions of how much to produce, and of that what fraction to export, to the entrepreneurs on the open market. Some pro-development New Mexicans lament the fact that much of our natural gas and coal are exported as raw materials rather than electricity. Environmentalists oppose converting these natural resources into electricity because water is a factor of production in the generation of electricity. Orders of magnitude are relevant here: Annual depletion of water in New Mexico is in the order of magnitude of 2.5 million acre feet. Irrigation accounts for 75 percent of the total depletion. Currently, water consumed in the generation of electric power is about 70,000 acre feet, a mere 2.8 percent of the total annual depletion. In the future, electric generating firms could purchase additional water rights in the marketplace without raising water prices appreciably.

Last, but not least, our elected leaders should not be tempted to raise the tax rates on our exhaustible natural resources for the simple reason that, although up to a point higher tax rates will yield more revenue, higher taxes will also result in a reduction of employment and weakening of economic activity.

c. Wind and Other Green Power

Generating electricity by burning coal, natural gas or using nuclear reactors on average costs between 3 and 4 cents per kwh. Of the three, the additional external cost to society and the environment is highest from coal and lowest from nuclear power. Once the federal government resolves the issues of nuclear waste, catastrophic insurance and who bears the decommissioning costs, nuclear generation of electric power will be revived. New Mexico, which is rich in uranium will definitely benefit from this trend.

PNM and Florida based FPL Energy built a 204-megawat wind-generation facility, or what is otherwise known as a wind farm. This deal was undoubtedly stimulated by New Mexico’s legislature endorsement of a rule mandating that five percent of utilities’ energy must come from green sources by 2006, and ten percent by 2011. Any minimal environmental gain from this project will “spread” over the entire southwestern states-it will be gone with the wind. According to the Wall Street Journal (August 27, 2002), although wind energy is clean, its cost is still 5.84 cents per kwh in good wind sites, and 3.89 cents in optimal wind sites. We cannot be sure if PNM embarked on this project because of federal subsidies (1.8 cents/kwh), or because wind farms politically endear PNM to the environmentalists who, in return, might support its battles to retain monopoly. It is difficult to conjecture what motivated the Public Regulation Commission (PRC) to dream up such a grandiose plan. Could it be the increasing instability in the Middle East? War in the Middle East could cause another energy crunch that might affect the transportation sector that depends on foreign crude oil, but not the electric-power sector that depends on plentiful domestic natural resources, such as coal, uranium and natural gas.

Could it be concerns for clean air? Probably. But, first, applying renewable energy in the generation of electricity in New Mexico would reduce the use of coal by the San Juan Generation Station near Farmington. The blessed wind does not recognize state boundaries. Consequently, the air pollution-reduction at the San Juan Generation Station would be spread over Arizona, Utah and Colorado: It will be gone with the wind within days. Do we, New Mexicans, like to pay higher prices for electricity to give our neighbors a free ride on clean air? I believe the answer is a resounding “no”, and this is why clean-air policies should be initiated at the federal level.

Second, mandates, known otherwise as social engineering, are arbitrary and economically inefficient. The decision as to when renewable sources should be used in the generation of electricity is best left for the marketplace. Of course, external costs from air pollution are involved in the generation of electricity. The external costs of using coal, gas turbines, nuclear reactors or even wind cannot be dismissed. But, clean air and water policies should be left for the federal government.

The federal energy policy is far from perfect. The energy industry enjoys outrageous subsidies and market distortions. Advancing renewable energy through subsidies is a bad idea. Such subsidies, like the 1.8 cents tax credit per kwh generated by wind, lead to political-pressure groups that invest time and money in lobbying for higher subsidies. The subsidy to ethanol is an example that has not met the test of time. The subsidy to ethanol, which is derived from corn, is alive and well even after it has been shown that it generates less energy than it takes to produce, and other gasoline-cleaner-supplements are available in the marketplace. Since it takes more energy to produce ethanol than ethanol produces, it probably causes more pollution than we would have with no subsidy at all. But it seems that the farm bloc has the political power to perpetuate a bad subsidy forever. Instead of subsidizing green energy resources, the federal government should tax natural resources that, in the process of producing electricity, generate conventional pollutants (sulphur dioxide, nitrogen oxides and mercury) and carbon dioxide.

As an illustration, a unit federal tax should be imposed per kwh of electricity derived from coal, and the revenues from this tax should be used in the development of clean coal technologies. Nuclear energy does not release any greenhouse gases, but its price does not reflect its true marginal cost. A permanent nuclear-waste facility in the Yucca Mountain should begin serving all nuclear reactors in the United States as soon as possible. Nuclear waste and decommissioning costs should be borne by owners of nuclear reactors. Also, the Price-Anderson Act which provides unlimited government insurance for nuclear reactors in case of catastrophic accidents should be rescinded. Electric utilities should pay for nuclear catastrophic insurance, and they should generate nuclear energy and sell it in the marketplace at a price that covers its true costs.

Mandating renewable energy in the generation of electricity is a tax on New Mexico citizens as rate payers-we don’t need higher taxes. California is mandating these senseless green initiatives in spades. In the unlikely event California mandates really do lead to discoveries producing long-term benefits, New Mexico will benefit without having to tax our citizens. Last, but not least, The New Mexico legislature is urged to guide the PRC to focus on its only logical mission, namely to protect New Mexico consumers from natural monopolies.

Categories
Economy Tax and Budget

TOPS 1: New Mexico Taxpayers’ Opportunity-Prosperity Safeguard (TOPS) Amendment

Prosper (prŏs’per) v. to fare well
To be prosperous, to have our friends and neighbors be prosperous is our aspiration. Economic opportunity and the prosperity that evolves from it should be New Mexico’s future. It is not far fetched to foresee average annual incomes in New Mexico up by $6,500 per person. How do we achieve such an increase in prosperity?
The key to prosperity is to instill more discipline in and control over New Mexico’s state government. More discipline and control enable tax rates to be reduced. Reduced tax rates spur economic growth by allowing hard earned money to be spent or saved by those who earn it.
The Rio Grande Foundation is pleased to document state government’s spending and taxing problems in detail and offer solutions that generate prosperity. Your comments are welcome. Please send email to Info@RioGrandeFoundation.org.
Categories
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
Categories
Economy

Santa Fe’s ‘Living Wage’ Misguided

abq_journal
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.
Categories
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.

Appendix

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  

0.166

0.79
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

Categories
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.

Categories
Economy

Let New Mexican Business In On Tax Breaks

abq_journal
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.
Categories
Health Care

Medicare Needs a More Logical Formula

abq_journal
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.