Category: Research

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Research Tax and Budget

Effective Income Tax Rates in NM on The Way Up

Effective rates of tax on income have actually gone up rather than down since beginning of Richardson Administration.
Did you know that the effective rate of tax on individual income has actually gone up rather than down since the beginning of the Richardson Administration?  We are tricked into thinking that individual income tax rates have gone down if we look only at that tax in isolation.
But federal and state taxes are inextricably intertwined.  And we can calculate effective tax rates with precision.  In particular, we calculate the effective rate of tax on individual income by assessing the interdependence of New Mexico’s gross receipts tax, its individual income tax and the federal income tax.
We begin with New Mexico’s gross receipts tax (GRT).  When an entrepreneur sells her service, she has to pay tax on the entire amount received even though some of it goes to cover expenses.  Fortunately, she does not have to pay federal or state income tax on the amount of the GRT payment.  The gross receipts tax rate has gone up by one-half percentage point or more in most New Mexico jurisdictions; and she has to pay that increase on her total receipts, not just on her income net of expenses.  For example the gross receipts tax rate has gone up by 15/16 of one percent in Albuquerque.  The more expenses she has relative to income, the more burdensome is the GRT.  High overhead service providers, such as Doctors, have been particularly hard hit by this tax [1].
Next consider the state individual income tax.  Its specific rate has been reduced from 8.2 percent to 6.0 percent.  It is deductible on both the state and federal individual income tax returns.
The federal income tax depends on how much state income tax is deducted and how much gross receipts tax is expensed as well as other deductions, business expenses and exemptions.  The taxpayer’s social security and Medicare “contributions” do not benefit from the state income tax deduction; but (thankfully) they are not applied to the gross receipts tax payment.
Here is an example of the bottom line for a taxpayer.  Say that her taxable income is 50 percent of her total receipts.  Give our entrepreneur a somewhat modest income: she is in the 25 percent federal tax bracket, 6 percent New Mexico tax bracket, makes “contributions” to social security and Medicare at the rate of 15.3 percent and has gross receipts that are twice her taxable income.  In that case her overall effective rate of tax on income is 52 percent [2]!  Compare that to an equivalent entrepreneur in Texas: her effective rate of tax is 40 percent. Now you can see how the gross receipts tax destroys jobs in New Mexico.  Maybe we should call our gross receipts tax the “Texas – Colorado – Arizona Economic Development Initiative.”
Let’s say our entrepreneur wanted to work harder so as to earn another $1,000 net of tax.  With an effective income tax rate of 52% she would have to increase her taxable income by $2,083.33; and she would have to increase her total receipts by $4,166.67.  Similarly, she would give up only $1,000 net of tax by taking it easier and reducing her gross sales by $4,166.67.  Or, if she moved to Texas, she would only have to increase her taxable income by $1666.67 and gross receipts by $3,333.33 to keep her extra $1,000 net of tax.
And at what point does it become permissible to ask about off-market means of avoiding these high tax rates?  There is probably a large off-market sector – the incentives to break the law are huge.  A thousand dollars earned net of expenses is rewarded with a thousand dollars net of tax. – quite a difference from having to earn $2,083 before tax.
The following table documents the effective income tax rates for a taxpayer in the 25% federal tax bracket and the 6% state tax bracket for varying taxable incomes as a percent of total receipts:
Income as percent of gross receipts\year Effective Tax Rate2005 Effective Tax Rate2004 Effective Income Tax Rate Increase
20%
63.26%
61.04%
2.22%
30%
57.02%
55.72%
1.31%
40%
53.90%
53.06%
0.85%
50%
52.03%
51.46%
0.57%
60%
50.78%
50.40%
0.39%
70%
49.89%
49.64%
0.26%
80%
49.22%
49.07%
0.16%
90%
48.70%
48.62%
0.08%
100%
48.29%
48.27%
0.02%
Our own Matt Mitchell has documented other increased New Mexico taxes in detail (see https://www.riograndefoundation.org/tops/tax_legislation_guide.htm).  Now that we know effective rates of tax on income are going up too, how can we claim to be “open for business” in New Mexico?  Aren’t effective income tax rates of 50 percent or more for someone of modest income high enough?  If not, how high is enough?  Enough already!
Since the effective rate of tax on each dollar earned is much higher than is usually thought in discussions of state taxes, the adverse effects of GRT “pyramiding” for New Mexico are a much worse than is usually thought.  Let’s get spending under control, so that we can reduce the gross receipts tax.  Let’s open New Mexico for business.
1 A harmful and unfair law was passed and signed in 2004.  For details see the Foundations paper: Treat Sick Tax Policy:  First, Undo the Harm from 2004 Legislature of January 9, 2005.
2 The algebra used to calculate the effective tax is easy but tedious.  The Foundation has a spreadsheet available to calculate effective rates of tax on income.  The user enters taxable income as a percent of total receipts, federal tax bracket, state tax bracket and local gross receipts tax rate.  If you would like a copy of the spreadsheet, just ask.
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
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
Economy Research Tax and Budget

Reform This! Coherent Tax Strategies for New Mexico

Change, Same Green Road Sign Over Dramatic Clouds and Sky.
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.
Categories
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.
Categories
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.
Categories
Health Care Research

Solutions to the Medicaid Crisis in New Mexico

Change, Same Green Road Sign Over Dramatic Clouds and Sky.
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.
Categories
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.
Categories
Education Research

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

Change, Same Green Road Sign Over Dramatic Clouds and Sky.

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.