Category: Tax and Budget

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Tax and Budget

Spending Will Trump Tax Reform

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New Mexico’s Tax Commission wants to make the state’s tax system fair, simple, and efficient. That can be done.

But there’s another requisite for tax reform: the new tax system must deliver enough money to Santa Fe to pay for whatever the legislature and the governor want to spend. That’s asking the impossible.
New Mexico needs some way of controlling its budget, or tax reform will be out the window within two years. Since it’s obvious we can’t count on the state legislature or the governor to rein in spending, some stronger medicine is needed.
New Mexico’s state spending per capita has grown rapidly in recent years, more than six percent a year, and the future looks worse.
The legislature has increased the education budget substantially and probably will continue to do so. Virtually nothing has been done to restrain Medicaid costs, even though this gold plated program is paying medical bills of thousands of people who have access to company plans but opt for the nearly free and more generous Medicaid. Government employment growth shows no signs of slowing, and the ever-popular “pork” spending will keep expanding too.
Here’s what’s likely to happen: The tax commission will suggest a whole raft of reforms. Some will make good sense (like removing the gross receipts tax on medical services) while others will merely tinker at the margin, lowering one tax and raising another. In aggregate, they’ll recommend increasing taxes by about enough to cover this year’s looming budget deficit.
While this modest agenda is evolving, the steam roller of spending will flatten all the good intentions, as a new budget “crisis” looms next year and beyond. All of the proposed increases in taxes will be slurped up by spending growth.
The budget will balance for about one year, and then more tax increases will be needed. The legislature will throw out every tax-cutting reform in order to cover new budget-busting expenditures.
The dire results: State spending increases will undermine the only growth-oriented piece of legislation yet passed-the reduction in income tax rates. It is all but inevitable that these cuts will be rescinded, with dismal effects on the business climate. Just as now, New Mexico will be mired in a sluggish economy caused by its high taxes relative to those in neighboring states.
There is nationwide precedent for the budget crunch I predict. California’s disaster is infamous, and substantial problems have appeared in most other states. Even wealthy Virginia is being forced to cut big chunks from its budget. No substantial help from Washington should be expected, as the federal budget deficit is enormous. New Mexico’s crisis will be late in coming only because of Governor Johnson’s tightwad approach that led him to veto of so many spending bills.
So what’s to be done? Look one state to the north.
Colorado sets a magnificent example that New Mexico should follow. In 1992, Colorado voters passed the Taxpayer’s Bill of Rights (TABOR), a constitutional amendment that limits state government spending to population growth plus inflation and allows only those tax-rate increases that are approved by voters.
TABOR worked wonders for Colorado. In the previous decade, spending grew twice as fast as population-plus-inflation, while in the ten years after the amendment’s passage the two were about equal. This helped private sector employment to grow twice as fast as government jobs. Moreover, the surplus rebate mechanism returned about $3,200 to an average family of four between 1997 and 2001. Colorado now faces a budget deficit, but it’s solving the problem with spending cuts, not big tax increases, thanks to its TABOR.
Does New Mexico have the willpower to follow Colorado? If not, we’ll have a worse economic mess than any well-intentioned tax commission can ever solve.
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Tax and Budget

Don’t Let Budget Crunch Stop Tax Cuts

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Both major party candidates for governor have pledged to reduce taxes. John Sanchez uses an effective TV ad that shows him standing on a giant map of the United States explaining that all of New Mexico’s neighbors have lower taxes and hence attract more job-creating investment. He and Bill Richardson promise to cut income tax rates and to phase out certain parts of the gross receipts tax, all in an effort to help the state’s economic growth.

Clearly they are on the right track. Study after study has shown that high taxes breed slow economies, particularly at the state level, where people can avoid taxes simply by moving to state with lower taxes.

But will our new governor be distracted by looming budget problems? Like many other states, New Mexico is headed for a budget crunch in 2003, as recession-weakened revenue sources and loosely controlled spending combine to produce a substantial deficit. Thus, it will be tempting for the new governor to conclude that tax cuts are no longer “affordable.”

But this would be a costly mistake. Recent analysis by economist Stephen Moore for the Cato Institute shows that state tax cuts are the right approach regardless of whether the economy is running hot or cold.

Moore shows that states with high tax burdens are likely to see economic decline, while those with lower taxes tend to grow rapidly. During 1990-2000, real personal income grew by 40.5 percent in the ten lowest tax states but only 25.6 percent in the ten highest tax states. Similarly, job growth was twice as fast in the low tax states. States that cut taxes also fared better than those that didn’t.

During the 1990s, Moore explains, some states tried to fix budget problems by raising taxes. For example:

  • In 1990, California raised the top income tax rate from 9.5 percent to 11 percent, which failed to raise revenues but drove top earners away. In 1995, the tax hikes were repealed and unemployment fell.
  • Massachusetts put itself on a similar roller coaster, with tax hikes meant to close a deficit, causing job losses that were reversed only by subsequent tax cuts.

Other states cut taxes and reaped economic rewards:

  • In the mid-1990s, Georgia cut several taxes (including its tax on groceries) and saw an economic boom that made it one of the fastest growing eastern states.
  • Michigan attacked its 1991 budget deficit of $1.5 billion not with tax hikes but with budget reductions and tax cuts. The Michigan economy responded with rapid job growth.

All evidence from other states implies that New Mexico’s next governor should hold firm on his campaign promise to cut taxes, regardless of how the budget appears. Raising taxes will only hurt the economy without solving the problem.

Given the power of tax cuts, I would go a few steps farther than Sanchez and Richardson. Too often they promise to “phase out” taxes that should be eliminated outright. For example, the tax on medical services is New Mexico’s worst tax and should be ended immediately before more good doctors leave the state.

Also, we should establish a long term fiscal policy that people can count on. Colorado, for example, has limited future tax and spending increases to the growth rate of population and inflation. This policy recognizes that budget control is necessary for any prolonged low tax strategy. Given New Mexico’s somewhat nonchalant budgeting, this restraint would give needed reassurance to taxpayers.

But above all, don’t try to cure any problem by raising taxes. It won’t work.

Dr. Kenneth M. Brown, an economist, is research director of the Rio Grande Foundation.

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Tax and Budget

Let’s Think Again Before Ending the Tax on Groceries

When Bill Richardson gets into the specifics of tax relief, he’ll receive lots of advice to end the tax on groceries. It’s not a bad idea. Everyone seems to agree that New Mexico needs lower taxes, and the food tax is a tempting target. But other taxes could be cut with much better results for the state’s lagging economy and for the quality of life in New Mexico.
Proponents of ending the gross receipts tax (GRT) on food say it would combat hunger, but in fact its effects would be undetectable. Look at the numbers. The tax is about 5.8 percent, so its removal would reduce the cost of food by that amount. Data on consumer spending show that families with income of $7500 spend, on average, $1,800 on groceries, which is 24 percent of their income. So ending the tax would put about $105 back into their pockets to be spent on food or anything else.
But how much of this extra money would be spent on food? Consumer data also show that at the margin people in that income bracket spend only about 10 percent of any extra income for food, the rest going to housing, clothing, transportation, and other items. So this means that our representative family would spend just $11 extra per year on groceries. Even maintaining its food spending at 24 percent of income would result in just $25 worth of additional food.
And even this small increment in the food budget is doubtful. For one thing, people in the low income brackets qualify for food stamps, which aren’t subject to the gross receipts tax anyway. Moreover, opponents of the food tax often propose raising some other tax to make up the lost revenue. One frequent idea is to raise the tax on cigarettes, a tax that ironically targets lower income people. Another proposal is to eliminate the food tax but raise the gross receipts tax on everything else. Clearly, simply rearranging taxes is not going to do much for the poor or anyone else.
Well, you might say, even though ending the food tax won’t do much for food consumption, at least it will give more money to the poor; and isn’t that a good thing? Maybe so, but New Mexico’s tax system is already quite progressive, and the resulting economic malaise leads me to challenge the need to tilt it further. What’s more, the tax savings wouldn’t go exclusively to the poor, and indeed the richer you are the more benefits you’re likely to get. A family with income of $67,500 would get a tax break of around $230, larger than the poor family’s tax savings (although smaller as a portion of income).
But the real problem with ending the food tax is that it would make it more difficult to cut other taxes that would have a much more beneficial impact on the quality of life and the New Mexico economy. It would lose about $50 million of state revenues and another $39 million at the state and local level. The state faces a tough budget situation, and the legislature needs to concentrate on tax cuts that would do the most good.
A prime example of a “quality of life” tax cut would target the gross receipts tax on medical services-New Mexico’s worst tax, in my view. It continues to drive doctors out of New Mexico, degrading the quality of health care for the rich, the poor, and everyone in between. Eliminating this tax would cost relatively little in lost revenues, and Governor-elect Richardson has said he’d work to get rid of it.
Another necessary target is the state’s high income tax rates, higher than those of any of our neighboring states and unquestionably a drag on the economy. Reducing the top and middle rates would be a major economic stimulus, particularly as it would encourage companies to locate in New Mexico. Analysis by the Rio Grande Foundation indicates that lowering the top income tax rate to six percent would create around 35,000 jobs and increase average earnings by $2,800 after four years. In contrast, ending the food tax would give little if any economic stimulus, particularly if other taxes were raised to compensate for the lost food-tax revenue.
Other tax cuts, in corporate profits and capital gains, for example, offer potential improvements to the business climate.
Ending the grocery tax by itself would have some modest benefits, but it’s not a priority. Let’s concentrate on the tax cuts we really need to make New Mexico better for everyone.
The author is research director of the Rio Grande Foundation.
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Research Tax and Budget

New Mexico Should Reject The Streamlined Sales Tax Agreement

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

The Pros of Privately-Housed Cons: New Evidence on the Cost Savings of Private Prisons

Rio Grande Foundation finds that private prisons mean big cost savings. New Mexico is in the vanguard of prison reform.
The Rio Grande Foundation has released a new study comparing the per-prisoner costs of incarceration across 46 states. Research economist Matthew Mitchell used regression analysis to isolate the factors that affect per-prisoner department of corrections spending.
He found that states with a large percentage of prisoners in private custody spent less per-prisoner than other states. States like New Mexico, for example, with forty-five percent of their prisoners under private management, spent $9,660 less per-prisoner in 2001 than non-privatized states. Given New Mexico’s prison population, that is an annual savings of over $50 million.
Other factors being equal, an increase in privately-housed prisoners was found to lower per-prisoner costs markedly. On average, states with five percent of their prisoners in private custody spent 14 percent less per-prisoner than non-privatized states. States with forty-five percent privatization, meanwhile, spent 32 percent less per-prisoner than non-privatized states.
New Mexico was one of the first states to privatize its prisons and has a higher percentage of prisoners in private custody than any other state in the union.
Mitchell’s study takes its place among a growing body of studies suggesting that private prisons are both cheaper and safer than public prisons.
Though not the focus of his research, Mitchell also found that states that enjoy right to work legislation spent $9,365 less per-prisoner in 2001 than states without such legislation. The evidence seems to suggest that if New Mexico joined the 22 other states with right to work laws, it would reduce per-prisoner spending even more.
Click here to download the full report in PDF format.
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Research Tax and Budget Taxes

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

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

Supercomputer is No Way to Spend Taxpayer Dollars

Recently it was announced that New Mexico had purchased an $11 million supercomputer to be housed at the Intel facility in Rio Rancho.

While partnerships have been established with Los Alamos National Laboratory and Sandia National Laboratories, the University of New Mexico, New Mexico State University and the New Mexico Institute of Mining and Technology, very little has been said publicly about how taxpayers will benefit from what will ultimately be a $42 million expenditure.

Sure, computers are great machines and most of us could not imagine our daily lives without them, but why does the state need one of the most powerful computers in the entire world? Sure, businesses and schools may use it for research, but will those uses generate anywhere near the $42 million taxpayers pay for the machine?

Clearly, purchasing massive computers — an obvious and unnecessary subsidy to business — is beyond the scope of what state government is supposed to do. In fact, this money could have been better used to fund the very roads and bridges that are now being neglected statewide.

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.