Category: Tax and Budget

Categories
Economy Research Tax and Budget

The Tax Man and the Moving Van: Fiscal Policy and State Population

This Rio Grande Foundation study, “The Tax Man and the Moving Van” examines U.S. Census data from 1995 to 2000 in an effort to determine the factors that drive Americans to relocate to other states. The study’s findings suggest that people exercise their options by moving into states with low tax burdens and favorable business climates, and exiting states with high tax burdens, poor business climates, and higher relative costs of living. New Mexico, a state which has historically had relatively high taxes and an unfriendly business climate, lost significant numbers of citizens – especially the young and educated – to other states during this period.

Click here to download the entire study.

Categories
Tax and Budget

Bill Richardson, Fiscal Conservative? Not So Fast!

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As the jockeying heats up for the 2008 presidential race, the field remains wide open, with potential candidates from both parties working hard to position themselves with their specific constituencies. New Mexico Governor Bill Richardson has indicated that he will run, and for a number of reasons he will be a formidable contender. Specifically, Democratic party leaders hope Richardson’s Hispanic background will restore this fast-growing demographic group to their base.
But Richardson’s ethnic background is certainly not all he has going for him. He also has a national image as a moderate on fiscal issues, which will be very helpful in a run for national office. Can we call Bill Richardson a fiscal conservative? Not so fast.
One of Richardson’s first moves as governor was to cut New Mexico’s top income-tax rate, which at the time was an elevated 8.2 percent. This was rightly praised by fiscal conservatives around the country, most notably Steve Moore and Steve Slivinski, authors of the Cato Institute’s 2004 Fiscal Report Card on America’s Governors. Largely due to his income-tax cuts, Richardson rose to near the top of that study, achieving a “B” rating. Moore and Slivinski were effusive in their praise, calling Richardson “an aggressive tax cutter, the best Democratic Governor in the nation bar none,” as well as “one of the best new governors in the nation.”
This was high praise, indeed, and at the time the numbers backed it up.
Of course, future elections will not be decided on 2004 data. And with Richardson running for reelection this year and planning a bid for the presidency in 2008, his less-than-stellar fiscal record since 2004 bears noting.
Though Richardson did cut New Mexico’s top income-tax rate — something his predecessor Gary Johnson had tried but failed to do because of a hostile legislature — his well-publicized cuts were more than offset by increases in other taxes and fees. In fact, overall tax-policy changes under Richardson have resulted in a net tax increase of some $174 million through fiscal-year 2006. Richardson should not be denied credit for reducing income-tax rates because of the salutary economic impact of such reductions, but calling him a “tax cutter” is not entirely accurate.
Aside from cutting income taxes, Richardson’s fiscal record fails to live up to his reputation. First and foremost, spending has risen dramatically during his time in office. Under Gary Johnson (1995-2003), general fund spending grew by a modest 5.2 percent annually. Richardson, on the other hand, has boosted spending an average of nearly 7 percent per year. This trend to spend shows no sign of slowing since the just-passed fiscal-year 2007 budget will grow by more than 8 percent.
More, in the aftermath of this year’s legislative session, taxpayers in New Mexico will be on the hook for several projects that will cost millions of dollars in coming years. The state will spend $318 million to create a new commuter rail project, for which only $1 out of every $10 will come from passengers. While gleefully throwing taxpayer dollars at 19th century transportation technology, Richardson also convinced the state legislature to subsidize 21st century transportation. Thus, $100 million in tax collections will be used to construct a first-of-its kind spaceport that will theoretically become the home base for future private space flights.
While spending hundreds of millions of dollars on special-interest goodies is bad enough, Richardson would have done far more economic harm if he’d succeeded in his attempt to push through a 46 percent increase in the state’s minimum wage. This legislation was thwarted at the last minute by a handful of senators from Richardson’s own party. Had it succeeded, it would have raised the minimum wage in low-cost, low-income New Mexico above that of high-cost, high-income states like New Jersey, New York, and California. Richardson, however, has vowed to continue trying to pass a massive hike in the mandated wage, and he may yet call a special legislative session to do just that.
The 2008 elections are still a long way off, but at this point Richardson’s income-tax cuts appear to be an aberration. It will be interesting to see how the governor positions himself over the next two years, and whether he shifts back to the right or continues moving left.
Categories
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
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
Tax and Budget

TOPS 3: Controlling Spending in New Mexico

State government spending is out of control. Real per capita spending on Medicaid is up 210% over the past 13 years. In public education, per capita spending is up 19% over the same period. The ineffective and unnecessary growth of government has severely reduced prosperity in New Mexico.
Have you ever wondered what New Mexico might be like had its citizens more freedom to prosper? What if its government had not grown so fast? We can get a good idea by looking at our neighbor to the north. Colorado has imposed tax and spending limitations by rule since 1992. These limitations are known by the acronym TABOR (Taxpayers’ Bill of Rights1). State spending is limited in Colorado to the rate of inflation plus the rate of population growth. In essence Colorado holds real state spending per capita constant, thereby preventing further erosion of individual freedom.
Suppose (like Colorado) New Mexico had implemented a constitutional limit on Leviathan in 1992. What would now be the size of its general fund budget as constrained by the rates of growth of population and the price level? Population has grown by an annual average of 1.6 percent in the period from July 1992 to July 2003. The price level has grown by an annual average of 2.5 percent from February 1992 (index of 138.6) until February 2004 (index of 186.2) as measured by the consumer price index. New Mexico would have limited general fund average annual growth to 4.1 percent (1.6% population growth plus 2.5% inflation).
The budget, however, has grown at a rate of 6.0 percent annually since 1992 (rather than at a constitutionally constrained 4.1 percent). Since the New Mexico general fund budget was $2,044.9 million in FY 1992, constitutional constraint would have limited it to $3,447.8 million for FY05 (beginning July 1 2004). Contrast that with the actual FY05 budget of $4,380.6 million! Limiting Leviathan would have saved the taxpayers $932.8 million. That works out to be $491 for every man, woman and child in New Mexico. According to our estimates such a saving would have permitted a gross receipts tax reduction of some two and one-half percent!
Some other observations based on the general fund budget over time:
  • Governor Johnson was able to hold spending to an average annual rate increase of 5.0 percent during his eight years in office, so total real per capita growth of the general fund budget was 7.5 percent. Despite Governor Johnson’s effort, New Mexico’s general fund budget for the comparable 13-year period has grown to be 28 percent more than Colorado’s in real terms.
  • We have previously examined Medicaid and found cures for its many ills. The Medicaid portion of the budget has been growing at an annual average rate of 13.3 percent! Total real per capita growth of the Medicaid portion of the budget has been more than 210 percent. If something is not done soon, it will bust the budget.
The prospect of a Colorado-like constraint on general fund spending is sure to raise howls of protest from wishful thinkers who believe that more spending makes things better. What about the kids? What about the poor? What about health insurance? The answers to these questions require some skepticism as to how government actually operates. For example, how long will the people engage in the wishful thinking that soviet-style, top-down control will eventually lead to “education reform” that really works? How long will they continue to ignore the incentives that make Medicaid such a poorly designed program and budget buster? Can they answer the question: How much more spending will be enough?
The Rio Grande Foundation envisions an active program of research and public information on these key questions about prospects for limiting Leviathan in New Mexico:
1. How would it impact the state’s main budget categories?
  • Education
  • Medicaid
  • Highways
  • Public safety
  • “Other”

2. What would be its effects on New Mexico’s economy?

  • Economic growth
  • Jobs in the private and public sectors
  • Provision of primary public goods

3. What has been the experience of other states that have enacted spending and taxation limitations?

  • State budgets
  • Attracting new business and residents to the state
  • Distribution of income
  • Ability to stick with the plan and resist weakening of the limitations
4. What is the best way for New Mexico to structure tax and spend limitations?
  • Alternative budget rules
  • Tax rate reductions versus the need for a rainy day fund
  • Accommodation of economic downturns
  • Constraints on local governments
Do not confuse this with what is now called a “taxpayer bill of rights” in New Mexico. New Mexico has no limit on spending and taxing.
Written by Kenneth Brown and Harry Messenheimer, PH.D.
Categories
Tax and Budget

TOPS 4: Controlling Taxing in New Mexico

Get the truth. Much has been written about how the Legislature and Governor have cut income tax rates over the past two years. Yet other prosperity reducing tax rates have either remained too high or gone up. Tax rate increases outweigh tax rate decreases. In fact, the net estimate of all tax rate changes is revenue increases: $70 million in FY2004, $124 million in FY2005 and $106 million in FY2006. New Mexico is not on a path to prosperity.
Understanding Tax Policy
Taxation has a profound effect on the state’s economic well-being. Most people, however, are too busy making a living to keep tabs on everything the taxman is up to. That’s why the Rio Grande Foundation is pleased to announce the release of its first comprehensive guide to New Mexico tax policy: 2003 & 2004 Tax Legislation Guide. In this Guide, we have summarized the most significant tax and revenue legislation enacted in the last two legislative sessions. More importantly, we have translated these bills from the inscrutable language of legislative-ese into plain and simple English.
The Big Picture
For years, tax revenue as a share of personal income has steadily increased. But in the late 1990s, with no new taxes in nearly a decade, the state’s economic growth began to outpace its tax revenue growth. Taxes as a share personal income finally began to decline. It looked as if this trend would be accelerated when, in 2003, the State Legislature enacted historic reductions in income tax rates. Unfortunately, in that same legislative session and in the subsequent session, some other tax rates were increased. By the Rio Grande Foundation’s accounting, tax increases raised state revenues by $70 million in 2004, $124 million in 2005 and $106 million in 2006. On top of this, the state government authorized up to $170 million in new local tax revenue.
Of course it is tax rates that do the real harm. And notwithstanding the planned reductions in income tax rates, other tax rates in New Mexico remain unnecessarily high or are increasing. In 2005 the gross receipts tax rate will go up 0.5 percentage points in municipalities statewide; and additional rate increases are allowed in local jurisdictions. Also, excise taxes are up significantly. Other tax rates and fees are up; and additional money is being taken from the state’s permanent funds.
Principles of Sound Taxation
Principles of sound tax policy are fairly simple. They have emerged from two and half centuries of economic research and are widely accepted among academic economists. According to these principles:
  1. Taxes should be low: High marginal tax rates discourage economic activity, and therefore discourage wealth creation.
  2. The tax base should be broad: No exemption should be made for politically popular activities or for politically powerful interest groups.
  3. Taxes should be fair: No one should get special breaks on their tax rates and no one should be singled out to pay more.
  4. Taxes should be simple: Every “targeted” tax or tax exemption entails both unintended consequences and more red tape for the taxpayer.
Overview of Tax Policy in New Mexico
Regrettably, the legislative process in New Mexico pays little heed to these principles. In the last two legislative sessions, forty-six bills affecting tax and revenue policy were signed into law (how’s that for simple?). Only one of these bills lowered tax rates: the much-welcomed income tax reductions of 2003. Five laws sort-of lowered taxes by creating or expanding tax credits (these credits can be claimed against your tax liability, but only if you do what the legislature wants you to). In contrast, the legislature passed and the governor signed fully eighteen laws that increased taxes (usually under the guise of “fee” increases). Three more laws permitted local jurisdictions to increase taxes. Six laws narrowed the tax base, compared with only two which expanded it. Twelve laws “earmarked” money from the General Fund and two laws allowed money in “permanent funds” to be used by the General Fund.
Highlights
The most conspicuous change in tax law from the past two legislative sessions was the income tax cut passed in 2003. Though not fully phased in until 2007, this bill represented a dramatic shift in New Mexico income tax policy. It reduced the number of tax brackets from seven to four. It also lowered tax rates-bringing the top rate from 8.2 percent to 4.9 percent. The bill will reduce revenue by $167 million over fiscal years 2004-2006.
Unfortunately, a string of tax increases more than made up for the income tax reductions. The single largest tax increase of the past two sessions was the cigarette tax increase, passed in 2003. This bill increased the per-pack cigarette tax by 329 percent. The bill is expected to raise $137 million for the state over the fiscal years 2004-2006.
Another giant tax increase came in a bill ironically called “Tax Relief and Highway Projects”. This inappropriately titled bill increases several taxes, some by as much as 38 percent. Every New Mexican with a vehicle is affected by the bill. Taxes are increased on everything from small cars to tractor-trailers. The bill is expected to increase tax revenue by $120 million over fiscal years 2004-2006.
Senate Bill 331, passed during the 2003 session is also expected to raise revenue: $96 million over 2004-2006. This bill, however, follows the principles of sound tax policy. Its revenue enhancements come entirely from a broadening of the tax base, rather than rate increases.
One of the more nefarious bills passed in the last two years is Senate Bill 385 from the 2004 session. This bill is a clever scam on federal taxpayers. Taking advantage of the federal government’s promise to match every dollar New Mexico spends on Medicaid with three more federal dollars, the bill artificially increases the cost of Medicaid by imposing a tax of $8.82 on hospital beds for every day they are occupied. Another bill, Senate Bill 436 is supposed to offset the “bed tax” with a $10 credit against individual tax liability. The credit can only be taken by individuals, however. Insurance companies see no relief from the tax. They, no doubt, will pass much of the cost off on consumers in the form of higher premiums. In any case, the tax credit does little to offset the “bed tax.” The tax increases government revenues by $45 million over three years. The credit offsets only $4.3 million of this new taxpayer cost.
Another noteworthy tax increase is embodied in Senate Bill 502 from the 2004 session. This bill raises net taxes on insurance premiums from 3 percent to 4.003 percent. It is projected to raise $32 million over three years.
Finally, House Bill 625 from the 2004 session is a prominent offender of the principles of sound tax policy. This bill not only narrows the Gross Receipts Tax base by exempting food and managed care medical and dental services, but it pays for these exemptions with an increase in the rates for everyone else, raising the state’s portion of the GRT in cities from 4.5 to 5 percent (counties and municipalities impose their own rates on top of that).
Tax Reform without Spending Reform
For more than a decade now, politicians of all political stripes have been talking earnestly about tax reform and tax reduction. Unfortunately, a slow but relentless climb in state and local spending has hampered their efforts. In 1992, state and local expenditures were 26 percent of state personal income. By 2002, state and local expenditures were 27.6 percent of personal income. Some of this spending is financed through fees, some through interest on state assets and some through taxes. Ultimately, however, all of the spending comes at a cost to the average New Mexican’s wallet. As long as state spending continues to claim an ever larger portion of state income, real tax reform will be nothing but a chimera. The New Mexico state government’s inability to commit to meaningful tax reform indicates the need for greater citizen control over tax policy. Over the next few months, the Rio Grande Foundation will launch a series of papers and initiatives profiling the ways the citizens of other states like Colorado have reclaimed control over run-away fiscal policy.
Authored by Matt Mitchell and Harry Messenheimer, Ph.D.
Categories
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 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 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.