Research Tax and Budget

New Mexico Should Reject The Streamlined Sales Tax Agreement

Executive Summary
Like statehouses across the country, the New Mexico state legislature will soon decide whether the state should join an interstate sales tax compact. Called the “Streamlined Sales Tax Agreement,” the compact is a radical departure from conventional tax policy. Because it permits the formation of an interstate tax cartel, there is good reason to believe that it would lead to more harm than good. The state should not join the Agreement.
Ostensibly designed to simplify interstate commerce and level the playing field between on-line and ‘bricks and mortar’ retailers, the Agreement would require signatory states to follow certain rules in taxing sales. More importantly (ominously), it would allow states to tax businesses outside their borders. For the first time in history, states would possess the authority to tax a transaction based on the consumer’s rather than on the producer’s location. By allowing states to tax a transaction based on where the consumer lives rather than on where the producer sells, the Agreement would violate one of the sacred precepts of American democracy: It would amount to taxation without representation. In addition, its enforcement would entail costly compliance and a potentially dangerous invasion of consumer privacy. Finally, by allowing states to establish an interstate tax cartel, the Streamlined Agreement would lead to inefficiently high taxes and less economic growth. Having misdiagnosed the true source of the seeming inequity in retail taxation, the Agreement’s proponents offer a cure that is worse than the ailment.
Click here to download a copy of the full report in PDF format.
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.
Health Care Research

Solutions to the Medicaid Crisis in New Mexico

This RGF study answers the following questions: Why is Medicaid so expensive? How rapidly will the costs grow if nothing is done to change the program? What are the options for controlling costs and how will these options affect the health and well-being of Medicaid recipients? What are the larger issues facing New Mexico and other states that stem from the federal government’s approach to Medicaid?
We find that New Mexico’s problems have five main sources:
  • Mandated benefits (no choice, really bad principles of insurance)
  • Overly generous benefits (no private insurer provides a benefit package as generous as Medicaid’s)
  • No incentive on the part of beneficiaries to be careful shoppers in finding and using health care benefits (payment is made almost entirely by someone other than the user)
  • Major disincentives to work and earn income (the generous benefit package comes with a means test, meaning you are severely penalized if you earn too much money)
  • The federal match to the state’s Medicaid expenditures provides the illusion of “free” money. Since each state is under the same illusion, the match actually results in a free-for-all among the states (each state pays a small portion of its own Medicaid to the federal treasury plus 49 small portions for each of the other 49 states, summing to one huge portion).

We make some major recommendations to fix these problems. Now is an opportune time to do so, since the whole program is out of control. The Bush administration is encouraging states to apply for waivers from Medicaid rules to try innovative, market-like solutions to solving problems. This presents New Mexico with a real opportunity to be on the cutting edge of innovation. One promising solution to Medicaid is a defined contribution approach. We illustrate the approach and the incentives involved by use of an example for a family of four.

Click here to download the full report in PDF format.
Research Tax and Budget Taxes

Lower Taxes – Period: The Right Way to End the Food Tax

The study “Lower Taxes – Period: The Right Way to End the Food Tax” assesses two bills that were introduced in the 30-day legislative session ending in February, 2002. Both bills gained a good deal of popularity, being marketed as a much needed tax reduction to help the poor and hungry.
Executive Summary
Eliminating the tax on groceries is not a bad idea. In fact, any tax reduction is probably a good idea in New Mexico. But we need to be realistic: eliminating the tax on groceries will not “reduce hunger” by any appreciable amount. And when coupled with tax increases meant to recapture lost revenues, ending the tax on groceries does more harm than good.
Two bills were introduced in February 2000 to end the tax on groceries. But coupled with the first bill is an increase in the excise tax on cigarettes by 60 cents per pack. Coupled with the second is an increase in the excise tax on cigarettes by 25 cents per pack and an increase in the overall statewide Gross Receipts Tax rate by one-quarter of one percent.
The intent of the bills was to aid the poor and hungry. But neither would do so. Since a disproportionate number of low-income people smoke, the harm imposed on them would more than offset the benefits from not paying the tax on groceries. The higher taxes on cigarettes would be even more regressive than the existing tax on groceries. In essence, the bills merely transfer wealth from smokers to nonsmokers.
Moreover, the new cigarette taxes would not raise nearly enough revenue to offset revenue lost from ending the tax on groceries. Since cigarettes are readily available in other jurisdictions (Indian land, other states), cigarette consumers would shift a large portion of their purchases to where they would avoid the higher New Mexico tax. Consequently other taxes would have to be increased if the bills are to remain “revenue neutral.”
Supporters of the bills alarmingly assert existence of a serious hunger problem in New Mexico. But they do so by relying on a controversial U.S. Department of Agriculture study and its update. The Department actually surveys a murky concept called “food insecurity,” not hunger. Other studies of hunger itself conclude that nutrition levels, particularly among children, are affected very little by income. Even the data on purchase of groceries supplied by the bills’ supporters implicitly deny a hunger problem: Poor people spend a small portion of their income on groceries; and as their income increases they tend to spend less and less for groceries out of each extra dollar of income.
There is a small extent to which the bills would induce consumers to purchase more groceries. But the extra groceries purchased would substitute mostly for already prepared food (such as fast food and restaurant food). Consequently there would be no noticeable improvement in nutrition among the poor.
Claimed tangential benefits from increasing the tax on cigarettes will not be realized either. Health care costs will not be lowered, and sin taxes are not an effective way to reduce problems of smoking and alcohol use among our youngsters. Health care costs will not be lowered because the earlier mortality of smokers tends to reduce nursing home and pension costs more than enough to offset smokers’ comparatively higher health care costs. To the extent that it is really an issue of public policy (rather than parental guidance), reducing the perceived problem of youth smoking would be better dealt with by directly penalizing youth smoking or the parents of youth smokers.
New Mexico is a poor state compared to others, falling near the bottom of most rankings. Moreover, the past 15 to 20 years have seen New Mexico record the slowest growth of per capita income among the lower 48 states. Bills such as those “ending the tax on groceries” (while quietly raising other taxes) come out with great fanfare, claiming that we are doing something to help our poor and make life better.
Yet these bills do not address the real problem and, in fact, would only make matters worse. Too much government interference (in the form of high taxes, regulation and disincentives to work) is the problem. What we need is real tax, regulatory and welfare reform, not just window dressing disguised as lowering taxes. Specifically, if we want to join those states with higher growth rates, we need more economic freedom in the form of lower tax rates, less regulation and smaller government. In that spirit the Rio Grande Foundation would embrace ending the tax on groceries as long as no other taxes are increased.
Click here to download the full report in PDF format.
Education Research

The Way to Education Success in New Mexico: Breaking Free from Failed Reforms

As Harry Messenheimer, PhD discusses in this article, New Mexico is spending more and more on K-12 education, but results on the respected National Assessment of Educational Progress have failed to keep up with those of children in other states. Messenheimer discusses the problem and how to fix it in this study which is available here.