Category: Tax and Budget

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Local Government Tax and Budget

Albuquerque Should Learn Lesson from Wi-Fi Debacles

Albuquerque Mayor Marty Chavez made a splash recently in the local media when he requested proposals from several companies asking them to find ways to create a free, citywide wireless Internet service. Providing free wireless access may sound like a great idea, but there are some big problems with the proposal.

First and foremost, while costs will not be known until all proposals are in, the experiences of Sandoval County in particular (and governments nationwide) show that wi-fi service could stick taxpayers with a big bill while stunting the growth of internet access in the City rather than moving it forward.

Before moving forward, in fact, city officials should carefully study the debacle unfolding with Sandoval County’s scandal-plagued broadband system. The County was originally supposed to provide fully-functional wi-fi access county-wide at a cost of $9 million. To date, 3 million taxpayer dollars have been spent with no results. Much of this money has been wasted or perhaps even stolen and state auditor Hector Balderas is now looking at situation.

Unfortunately, Sandoval County is by no means alone in its struggles with taxpayer-financed internet access. As Sonia Arrison, Dr. Ronald Rizzuto, and Vince Vasquez, report in their recent report, Wi-Fi Waste: The Disaster of Municipal Communications Networks, published by the Pacific Research Institute, publicly-financed broadband systems invariably cost more and deliver less than promised.

The survey examined 52 government-owned networks that compete in the cable, broadband, and telephone markets. It concludes the government-owned systems are “financial disasters.”

Among the major problems with these systems is that they rely heavily on loans and transfers from established municipal utilities such as electricity and water. Even with the power of the public purse, 77 percent of the time municipal networks can’t pay their way, the report observes.

As government officials rush to show leadership and take credit for delivering the goods, they often trade short-term political benefits for serious, long-term financial problems: cost overruns, mounting debt, and tepid profits, the report observes.

Even with access to subsidies and loans not available to private-sector companies, municipal systems can’t break even, let alone establish positive cash flow, the report notes.

“Adding all the operating years together, our select sample of publicly-financed systems has been in existence for 294 years,” the authors write. “Of these 294 years, these operations have incurred negative free cash flow in 227 years. In other words, 77.2 percent of the time these networks have not paid their way.

Those subsidies also enable the government-aided networks to use their funding advantage to drive out more efficient private-sector competitors. This may not sound like much of a problem in the short term if the city receives is a “state-of-the-art” system at the outset, but unlike roads and sewers, internet technology is evolving constantly and rapidly.

Today’s wi-fi technology may not be enough for tomorrow’s needs. Unfortunately, depending on how the technology evolves, competing with a “free” service may be too much for Qwest and Comcast, thus negatively effecting high-end users.

Rather than throwing more money at a wireless project, Mayor Chavez should let the free market – that is the wireless companies and their customers – decide how widespread and robust wireless service needs to be. Some people are clearly willing to pay for high-speed wi-fi access in their own homes or at their local coffee shop. Why should they make the rest of us pay for a city-wide system?

Paul Gessing is President of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

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Tax and Budget

Soda Tax Silly, Not Needed

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Santa Fe’s City Council is considering separate proposals to levy a new two-cent tax on soda and raise the gross-receipts tax by two half-cent increments. A portion of the tax increases would be used to expand the city’s parks and open spaces while revenue from the increased gross-receipts taxes would be split between the Children and Youth Commission and the Human Services Committee.

Each tax hike is being promoted under the banner of “for the children,” a tried and true way to garner widespread support for misguided policies. But why are each of these policies misguided?

For starters, the soda tax is unfair. It unnecessarily targets one group of people — soda drinkers — to pay for something from which most of them will never benefit.

Obviously, the councilors now targeting soda believe that soda is “bad,” and that people should drink less of it. This is nothing new, as politicians have long used taxes in their attempts to make us better, more moral people. Why do you think taxes on beer and cigarettes are so high?

If the Santa Fe Council wants to stop childhood obesity, then why not provide real incentives for kids to lose weight? Weigh the children every month when they are in school. For each pound they are overweight, as determined by the National Institutes of Health, they or their parents would be “taxed.”

The “Weight Tax” could be paid that day at the school nurse’s office where dietary and health literature and counseling could be given the child. There’s no reason to tax the rest of us who drink an occasional soda for the overindulgences of a few. Besides, soda is not the only “bad” food out there. Burger taxes, pizza taxes, and ice cream taxes can’t be far behind.

On the matter of the gross-receipts tax: economically speaking, it is this one-cent increase which will really inflict harm on Santa Fe’s economy. Santa Fe already has the heaviest gross-receipts tax burden of any major (25,000 people or bigger) city in New Mexico, a one-cent increase would give the city an astounding 8.875 percent gross receipts tax rate. The new rate would be an astounding 25 percent greater than the rate charged in Albuquerque.

While 8.875 percent might sound like just another number with little meaning, consider that Tennessee is the only state with a higher average sales tax rate within its borders. Unlike New Mexico, however, Tennessee has no income tax. But even in this context, Santa Fe’s gross-receipts tax rate is misleading because New Mexico’s gross-receipts tax is different from sales taxes in other states.

Unlike other states’ sales taxes, the gross-receipts tax covers everything, including services, and business-to-business transactions are also taxed, whereas other states only tax final-consumption goods. Lastly, the entire proceeds of each transaction are taxed in New Mexico. Some relief for New Mexico’s goods-producing industries comes in the form of a deduction for the cost of raw materials. Only a few politically favored industries receive exemptions from the tax under state law.

What does this all mean? While some wealthy outsiders and tourists will have no problem paying a little bit more for a can of soda or a meal in one of Santa Fe’s fine restaurants, it is the average business person and middle- or low-income resident of Santa Fe who will bear the brunt of these tax hikes. But even Santa Fe’s tourist industry might eventually suffer from high taxes. Santa Fe’s tax burden might cause tourists and part-year residents to look elsewhere.

Holt Priddy is a Policy Analyst with the Río Grande Foundation, a nonpartisan, tax-exempt research and educational organization promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

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Local Government Tax and Budget

Take Time Booting Up Albuquerque Wi-Fi Deal

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The city is evaluating plans from five companies that submitted proposals last week to create a citywide wireless system for Internet and other communications.

The competitive process was kicked off by Mayor Martin Chávez as a way to bring free wireless to town and get more residents than ever before connected to the Internet.

The mayor envisions a two-tiered wireless Internet signal covering the entire city that will support not just the basics of Web surfing, e-mail and the like, but phone service and video as well. If this vision is fulfilled, the basic tier will be a free, 1 megabit signal for anyone and a premium service at 3 megabit for a reasonable cost. A secure 4.9 gigahertz signal for the city’s private use— fire, police, rescue and such— is also part of the proposal.

This all sounds great, and if a company is willing to step up and make what some analysts believe could be a $25 million investment for the privilege of providing this service, it would be hard for the city to say “no.”

But there are some very real stumbling blocks on the entrance ramp to the information superhighway that have tripped up our neighbors in Rio Rancho and Sandoval County.

Back in 2003, Rio Rancho contracted with a Michigan-based wireless company named Azulstar to provide eight hours of free wireless service to anyone accessing the network within city limits in return for use of the city’s rights of way.

The system is so dysfunctional that the agreement has been put on life-support until mid-August, at which point the deal may be terminated by the city. But, at least it hasn’t cost taxpayers anything.

Sandoval County, on the other hand, has wasted at least $1.2 million on a system that, according to County Commissioner David Bency, is no more usable than “a series of tomato cans attached to a string.”

The problems that have plagued both systems should serve as a warning to Albuquerque leaders that they also must carefully evaluate the city’s role in setting up such a system. At the very least, Albuquerque must stick to its guns by making sure that no taxpayer money be spent to subsidize a wireless system.

Additionally, while not a direct financial subsidy, it would also be a mistake to give one provider exclusive favors that it doesn’t offer to other potential entrants. This could be a major stumbling block as any company making a $25 million investment will likely want to lock in some kind of monopoly status in order to protect its investment. Of course, consumers would then be locked in to the municipal service as other providers leave the city unable to compete with a favored provider.

It is important to have a clear understanding that providing wireless service is much different than managing roads and sewers. Roads and sewers require investments that make their private provision quite difficult under current conditions. Will the new system put private industry out of business?

Assurances must be made to ensure that those who are willing to pay for Internet and wireless services above and beyond what the city’s chosen provider offers will have that option available and that existing competitors will not be driven out of the market.

The last issue is changing technology. New technologies known as GSM (global system for mobile communications) and CDMA (code division multiple access) are widely deployed by major commercial providers. Is Albuquerque’s provider going to be ready to change if another technology takes hold? What if wi-fi becomes irrelevant as a technology in just a few years?

It is human nature to want something for nothing. Nowhere is that attitude more prevalent than the fast-changing field of computing, where more powerful at a lower price is the expectation.

Before we delegate our choices over how we connect to the Internet to the city’s chosen contractor, Mayor Chávez and the council must have a firm grasp on the issues and be willing to walk away if no one can properly fulfill these requests.

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

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RailRunner Tax and Budget Transportation

Richardson’s Santa Fe Line

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Bill Richardson has done a lot of things since becoming governor more than four years ago, including cut taxes. But what he hasn’t done is earn his stripes as a “fiscal conservative.”

That may surprise those who follow the Democrat’s presidential campaign. But there is more to Mr. Richardson’s fiscal record than tax cuts. He’s also a profligate spender who is laying groundwork that will make it harder to keep taxes in check and the budget in balance in the coming years. Mr. Richardson isn’t a spending hawk. He’s more like a roadrunner — New Mexico’s state bird — darting across the landscape, trying to stay ahead of the anvil that is inevitably coming.

Consider the state’s general fund, that portion of the budget over which the governor and the legislature have the most control. This year it hit $5.6 billion, up $1.5 billion since Mr. Richardson took office in 2003. The governor asked for and received an 11% increase in spending this year, the biggest jump in memory, outstripping inflation and population growth in the state.

And where is this money going? One of Mr. Richardson’s priorities has been the State Children’s Health Insurance Program (Schip), which is run under federal guidelines but administered and partly funded by the state. Bill Clinton launched Schip a decade ago, and it has been used by Democrats to expand federally controlled health care ever since.

This year Mr. Richardson wanted Schip to cover children of parents who make up to 300% of the federal poverty line (up from about 200%). That was too much for the legislature. But Mr. Richardson did succeed at getting the children’s program to cover more adults. Previously, only the state’s poorest adult residents were eligible. Now adults earning two times the federal poverty rate can receive health benefits through the program. His record of expanding government-run health care on the state level is a pretty good indicator of what he would do as president.

Mr. Richardson also likes trains. One of his pet projects is the Rail Runner, a commuter train that connects the northern and southern suburbs of Albuquerque and has been beset with financial problems, although its full length has yet to be completed. An anticipated $75 million in federal financing for the project has fallen through, so state residents will have to foot the entire bill.

To complete the project, 20 miles of track will need to be run through the desert to Santa Fe at a total cost of about $400 million (not a small sum in this state). This for a train that will take an hour and 20 minutes to complete a trip that takes just one hour by car.

Usually, commuter rail is built to take automobiles off of the roads during rush hour. But Santa Fe is a city with just 70,000 residents, and some people wonder: How many cars can this train really replace? While there are isolated pockets of congestion, the problem in New Mexico isn’t too many cars but too few overpasses and too many stoplights.

Mr. Richardson’s secretary of transportation, Rhonda Faught, admits that the Rail Runner will need as much as $10 million a year in ongoing subsidies. Meanwhile, ridership lags behind other commuter rail systems. The Rail Runner averages about 2,000 riders a day. The Virginia Railway Express, which ferries commuters in the suburbs of Washington and which cost much less to build due to the use of existing track, has about 14,000 riders a day.

That puts the governor in a tough spot. He now needs funding from the Democratically controlled legislature for a project that residents are already showing that they’re reluctant to climb aboard. But pushing the project may not be a bad political decision on Mr. Richardson’s part. A few years ago, he took a political pounding when it was revealed that he was chauffeured about the state in gas-guzzling automobiles. He now sports around the state in an alternative-fuel SUV, something environmentalists and corn farmers in Iowa love. Commuter rail is his eco-friendly SUV on a grander scale.

Mr. Richardson won re-election last year in a landslide. And he’s been able to get away with his spending spree while cutting income tax rates for top earners to 4.9% and capital gains tax rates to 2.45% (both down from 8.2%). In large part he’s managed this feat because the state is awash in energy tax revenue, partly because he’s raised gasoline taxes, but mostly because New Mexico is an energy-producing state. It’s a funny phenomenon, but one that all oil- and gas-rich states experience. When prices at the gas pump squeeze drivers, the state brings in tax revenue by the truckload.

This year the state took in $1.23 billion in oil and natural-gas tax revenue. That’s up dramatically from four years ago when the state took in some $552 million. But if energy prices fall so too will tax revenue, and the party is over. Indeed, even in a booming economy, the state treasury could find itself coming up short — not good for a politician concerned with an image for fiscal conservatism.

But Mr. Richardson hopes soon to be on to something else. He’s actually been on the move for well more than a decade. In 1997 he left Congress to become U.S. ambassador to the United Nations. Shortly thereafter, he served as President Clinton’s secretary of energy. As governor, anticipating a lot of foreign-service work, he hired a part-time staffer to give him pointers on international etiquette. He also finagled, with sanction from the Bush administration, two meetings with North Korean officials, one of which took place in Santa Fe. He seems to enjoy being a go-between for the secretive Stalinist regime and the current administration.

It’s this foreign policy experience that he now hopes will propel him into the White House. While a Richardson presidency would likely be to the right of a Clinton, Obama or Edwards administration on fiscal matters, labeling the governor of New Mexico a “fiscal conservative” is a bit of a stretch.

Mr. Gessing is president of the Rio Grande Foundation.

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Local Government Tax and Budget

County Should Stay Out of Wi-Fi Business

Sandoval County’s scandal-plagued effort to create a county-wide publicly financed broadband system has been widely-reported on. The project has received $3 million in state and county funding for the supposed purpose of providing cheap, ultra-high-speed wireless access countywide, but much of this money has been wasted or perhaps even stolen. State auditor Hector Balderas is now looking at the situation.

Though it would be easy to simply blame the contractors and government officials who are attempting to get the project up and running by 2009 for being corrupt and/or incompetent, the fact is that Sandoval County should not be involved in such a project in the first place.

As Sonia Arrison, Dr. Ronald Rizzuto, and Vince Vasquez, report in their recent report, “Wi-Fi Waste: The Disaster of Municipal Communications Networks,” published by the Pacific Research Institute, publicly-financed broadband systems invariably cost more and deliver less than promised.

The survey examined 52 government-owned networks that compete in the cable, broadband, and telephone markets. It concludes the government-owned systems are “financial disasters.”

Among the major problems with these systems is that they rely heavily on loans and transfers from established municipal utilities such as electricity and water. Even with the power of the public purse, 77 percent of the time municipal networks can’t pay their way, the report observes.

Those subsidies enable the government-aided networks to use their funding advantage to drive out more efficient private-sector competitors.

As government officials rush to show leadership and take credit for delivering the goods, they often trade short-term political benefits for serious, long-term financial problems: cost overruns, mounting debt, and tepid profits, the report observes. The report clearly shows what Sandoval County now knows: “Public telecom networks are risky gambles, regardless of the technology or the business model.”

The report also reveals the extent to which these operations rely on interest-free loans, inter-utility transfers, and permanent subsidies, the details of which in many cases are buried in financial reports, if reported at all.

“The footnotes in most of the networks’ financial statements have omitted any discussion of cost allocation between the telecom utility and other utilities, which suggests that utility accountants may be shifting around costs to enhance the appearance of telecom profitability,” the authors report.

The utilities also appear to be hiding other significant costs. “There is also the issue of system accountants’ failing to divulge major financial transactions on the printed public record. For example, at the end of the 2003 fiscal year, the telecom network of Harlan, Iowa, received an intra-utility loan for $768,025. In 2004, this intra-utility loan was forgiven but the financial-statement disclosures did not provide any explanation for this transaction,” the report says.

Even with access to subsidies and loans not available to private-sector companies, municipal systems can’t break even, let alone establish positive cash flow, the report notes.

“Adding all the operating years together, our select sample of publicly-financed systems has been in existence for 294 years,” the authors write. “Of these 294 years, these operations have incurred negative free cash flow in 227 years. In other words, 77.2 percent of the time, these networks have not paid their way.

Sandoval County is not alone. The county’s venture into providing the latest in high-speed Internet access was likely to cost taxpayers more and deliver less than was expected from the very start. The fact that governments run businesses poorly is a lesson that needs to be reinforced regularly lest other New Mexico governments repeat Sandoval County’s mistakes.

Rather than throwing more money at a wireless project that is clearly going to cost taxpayers far more than the original $9 million estimate, Sandoval County should “pull the plug” on this foolhardy taxpayer-financed venture immediately.

Some people are clearly willing to pay for high-speed wi-fi access in their own homes or at their local coffee shop. Why should they make the rest of us pay for a county-wide system?

PAUL GESSING is president of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

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Tax and Budget

City’s Sales Tax Needs Cutting

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Albuquerque Mayor Martin Chavez has proposed a one-eighth cent reduction in the gross-receipts tax rate. If the City Council goes along with the plan, the rate charged within the city would drop from 6.875 cents to 6.75 cents on each dollar spent, and $18 million that would have been budgeted by the city would be returned to taxpayers.

Tax cuts are always welcome news for taxpayers, and across-the-board tax cuts (as opposed to cuts that focus on one industry or even company) drive the kind of economic development that will further recent efforts to attract businesses and entrepreneurial activity to the city.

Albuquerque’s gross-receipts tax does untold economic harm to the city. The high rate charged is bad enough— the rate of 6.875 percent is higher than the average sales tax rates found in all but 18 states— but the fact is that this comparison underestimates the true impact of our gross-receipts tax. After all, only two other states (Hawaii and South Dakota, both of which have lower rates) apply their taxes as broadly as we do.

Unlike the sales taxes levied by neighboring states, our gross-receipts tax is levied not only on purchases of specific goods, but also includes services and some business inputs. This creates “tax pyramiding,” an unhealthy situation in which taxes are levied on top of taxes. It is the pyramiding effect that John Carey, president of New Mexico’s Association of Commerce and Industry, calls his organization’s “single greatest concern with New Mexico’s tax system.”

Gross-receipts tax rates in Albuquerque have jumped in recent years. The current 6.875 percent rate is 18 percent higher than it was as recently as 2000, when the rate was only 5.8125 percent.

Obviously, Albuquerque cannot completely abandon or even dramatically alter this burdensome tax structure by itself. And Gov. Bill Richardson and the Legislature are partially responsible for recent increases in gross-receipts tax rates due to the economically-misguided 0.50 percent tax hike that was passed when the state eliminated the gross-receipts tax on groceries a few years ago. Thus, Chavez’s proposed tax cut must be considered a positive, albeit small, first step for the city.

Even after accounting for the statewide half-cent brought on by the grocery tax cut, Mayor Chavez has more tax cutting to do if he wants to come close to creating as favorable a tax climate as the city had in 2000. Albuquerque’s gross-receipts tax would be only 6.3125 percent today if he and Council hadn’t piled on tax hikes of their own.

All of this talk of a tax cuts is welcome, but an even bigger decision will come in 2009, when a final decision must be made on extending the “temporary” transportation tax for streetcars or something else entirely. By then taxpayers will know for sure whether or not a favorable economic climate is really at the top of the local agenda. If that tax is allowed to expire, taxpayers will see a quarter-cent reduction in the gross-receipts tax coming their way, double the size of the mayor’s current proposal.

Repeal of this “temporary” transportation tax will have a far greater impact on Albuquerque’s economic future than the current tax cut will, but if both cuts are made, the gross-receipts tax rate within the city will be back down to a respectable 6.5 percent.
To some observers, heated debates over tax increases and decreases that account for mere fractions of a penny on the dollar may appear overblown, but to small businesses with high overhead costs that make them prone to tax pyramiding, even the smallest cut or increase can be the difference between staying in business and moving elsewhere.

Cutting taxes also sends a message to entrepreneurs and small businesses that they are welcome.

Albuquerque city councilors should put aside their fears of lost revenue and cut the gross-receipts tax now. Furthermore, when the time comes, it should continue additional cuts by not renewing the “temporary” transportation tax.

Paul Gessing is the president of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

Categories
Economy Tax and Budget

Tesla Deal No Model for Economic Development

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

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

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

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

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

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

Paul Gessing is the president of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

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Tax and Budget

One Small Step for Fiscal Sanity?

Government spending is out of control in New Mexico. Fueled by a “windfall” of oil and gas revenue, Governor Richardson has proposed an 11 percent one-year budget increase that even the most optimistic in Santa Fe concede is “unsustainable.” With oil and gas prices dropping already, it is only a matter of time before New Mexico faces the music and trims its budget.

Unfortunately, without external limits of some kind, the natural inclination of politicians is to spend whatever the government takes in. After all, the special interests – those who typically receive direct benefits from government spending – have the incentive to hire lobbyists to work the halls of the Roundhouse in search of a bigger piece of the budgetary pie. Worse, with 11 percent spending growth on the table, there is no incentive for politicians to prioritize their spending.

But who stands up for the taxpayer in Santa Fe? The answer is usually nobody. That’s not because taxpayers don’t care; it is because as a broadly-dispersed interest group the incentives for lobbying are reduced.

So, how do we solve the problem of unchecked government spending? An amendment to the New Mexico Constitution known as the Taxpayer Protection Act was recently introduced by a group of House and Senate Republicans. The Act would amend New Mexico’s constitution to limit spending growth to 3.6 percent plus the rate of population growth in the state. In the event of a surplus, 60 percent of the unspent revenue would be deposited in the severance tax permanent fund with the other 40 percent returned to New Mexicans in the form of a rebate.

If it had been in place since FY 1989, the Taxpayer Protection Act would have resulted in $520 million being refunded to the taxpayers and an additional $780 million being deposited in the state’s permanent fund. General fund spending would be $3.8 billion this year as opposed to nearly $5.1 billion (a number that doesn’t even take into account the Governor’s proposed $5.7 billion in FY 2008 spending.

Placing limits on spending is a delicate balance. On one hand, you don’t want government to spend every nickel that comes in, but on the other hand, spending limits should have some teeth. Depending on your point of view, Colorado Taxpayers’ Bill of Rights is either the gold standard for tax limitation or the poster child of what to avoid. It is unlikely that New Mexico will adopt anything as strict as Colorado’s limit anytime soon.

Colorado limits spending to the combined effects of inflation and population growth. While the Taxpayer Protection Act also accounts for population, it gives a more generous 3.6 percent rate of increase than inflation would have provided in recent years. Since 2000, the annual inflation rate has never exceeded 3.4 percent and it has averaged 2.8 percent. This gives New Mexico government more room to grow than Colorado’s law allowed.

In addition to allowing for more government growth, the Taxpayer Protection Act differs from Colorado’s TABOR in that rather than refunding all excess revenue to taxpayers, 60 percent of the excess is placed in the state’s permanent fund for future use. In light of the fact that much of the $720 million in “new money” is the result of one-time resource extraction, this makes a lot of sense.

While future generations will thank us for putting more money away for them and current taxpayers will undoubtedly enjoy receiving tax rebates, limiting government growth will shift limited resources out of government and into the private sector, thus spurring long-term economic growth in New Mexico.

There are those who may quibble with the particulars of this proposal. Some will say it is too strict and some will say it is too lenient. But, the Taxpayer Protection Act is a good place to start the discussion on spending limits in New Mexico. Hopefully, legislators who are more typically inclined to spend with reckless abandon will give this legislative effort a fair hearing.

Paul Gessing is the president of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.

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Tax and Budget

New Mexico’s Taxpayer Protection Act: One Small Step for Taxpayers?

This Rio Grande Foundation study, “New Mexico’s Taxpayer Protection Act: One Small Step for Taxpayers?” takes a closer look at the Taxpayer Protection Act and analyzes its impact on taxpayers and New Mexico’s general fund budget.

Click here to download the study in pdf format.

Categories
Tax and Budget

Las Cruces Residents Should Think Twice Before Voting to Increase Gross Receipts

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Bill Richardson has invested a lot of political capital in the proposed spaceport. He even took time out of his busy presidential campaign schedule to visit Las Cruces and make the pitch that voters should raise the gross receipts tax rate to help fund the project. But, while politicians only want you to see the new spaceport, they are downplaying the very real risk that the project will be a costly failure, not to mention the economic costs of further increasing gross receipts tax rates.

Residents of Doña Ana County and throughout southern New Mexico have to wonder if their tax money will be wasted. After all, New Mexico’s spaceport will be competing to serve a market for private space travel that doesn’t even exist yet. Did you know, for example, that despite all the money New Mexicans are throwing at gazillionaire Richard Branson, his company Virgin just signed an agreement to use a Swedish spaceport? Are you aware of the fact that there are already three dozen operational spaceports worldwide?

Far from being a sure-fire investment, the spaceport will be just another example of politicians spending your tax money and taking credit for success or disassociating themselves with a failure.

The spaceport and other recent initiatives to increase government funding for corporate welfare under the code words “economic development” are counterproductive. They are the result of what economists call “concentrated benefits and widely dispersed costs.”

Those who receive the concentrated benefits are clearly defined, and they are grateful when politicians show up for ribbon cutting ceremonies and take credit. But those who pay in terms of lost business opportunities, jobs and wages are unseen and unheard, since the effects on them are individually imperceptible. Unfortunately, each time the gross receipts tax rate ratchets up just a little bit to support these boondoggles the widespread losses outweigh the concentrated benefits.

For many taxpayers, a quarter percentage point increase in the gross receipts tax may seem very reasonable at first glance, even if the spaceport’s success is not guaranteed, but the unique issues associated with New Mexico’s gross receipts tax mean that increasing it should never be undertaken lightly.

Take a hypothetical entrepreneur whose costs are 50 percent of her total receipts. Las Cruces currently levies its gross receipts tax at 7.125 percent on her. A quarter percentage point increase will raise her rate to 7.375 percent. This may still seem comfortably lower than El Paso’s sales tax rate of 8.25 percent, but in reality the current gross receipts tax rate ­ even before a potential spaceport tax hike ­ makes the tax burden some 75 percent higher for a service producing entrepreneur in New Mexico than it is in Texas!

To make matters worse, the business-to-business application of the tax can add another eight percent to NM’s tax burden relative to Texas. For entrepreneurs whose costs are greater than 50 percent of receipts the burden is even higher.

What makes New Mexico’s gross receipts tax so burdensome? Simply put, New Mexico’s gross receipts tax is not at all like a sales tax. Unlike Texas’s sales tax, for example, New Mexico’s gross receipts tax covers everything (including services). Only a few politically favored industries are exempted. Unlike most other states, New Mexico also taxes business-to-business transactions (Texas only taxes final consumption goods). The entire proceeds of each transaction are taxed in New Mexico. Some relief for New Mexico’s goods producing industries comes in the form of a deduction for the cost of raw materials.

So, what is the extra burden of this seemingly small increase (one-quarter of one percent) in the gross receipts tax rate for Doña Ana County? Instead of a business tax burden on services that is some 75 percent higher than Texas in the example above the burden would rise to 81 percent higher. Thus we see that small changes in the gross receipts tax rate can make a big difference.

Rather than spending millions of taxpayer dollars on a costly spaceport that may never provide a return on investment, isn’t it time we lowered the gross receipts rate to attract businesses and jobs the old-fashioned way?

Dr. Harry Messenheimer is a senior fellow with the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.