Category: Taxes

Carlsbad Tax Hike Could be Avoided

Post author By Marina
Post date September 2, 2008

A year ago, I visited Carlsbad to present Mayor Bob Forrest and the City of Carlsbad with a reward for having the lowest overall tax burden in New Mexico. Soon, voters in the City will face a ballot measure asking them whether or not to increase their gross receipts tax from 6.8125 percent to 7.3125 percent.

Such a dramatic tax hike would certainly have a negative impact on the City’s relative tax friendliness, but more importantly the tax hikes are not necessary.

The City expects to raise approximately $45 million from the tax hikes with the money to be allocated for a several water-related projects around town. Carlsbad is not alone in struggling with the expense of maintaining its water system. According to the U.S. Conference of Mayors, capital expenditures on water and wastewater services are the largest issues facing local governments today.

Perhaps, with the City’s water system in such dire need of repair, voters, by saying “no” to this tax increase, could force Carlsbad’s political establishment to consider privatization?

According to the Reason Foundation, a free market think tank dedicated to infrastructure issues, privatizing of metropolitan water systems presents a great opportunity for cost savings. Through privatization, water companies can take advantage of advanced technology, more flexible management practices, and streamlined procurement and construction practices to lower costs and make the critical improvements more quickly.

Water privatization is a growing trend. According to the EPA, more than 40 percent of drinking water systems nationwide are private, regulated utility systems. Of the others that are publicly owned, a 1997 International City/County Managers Association (ICMA) survey found that 5.7 percent of the responding cities privatize water distribution and 3.7 percent contract water treatment.

According to the EPA, there are 280 small-to mid-size (1 to 10 million gallons per day) facilities and 40 large facilities of more than 10 million gallons per day now contracting with private partners for wastewater operations. In the ICMA survey, 6.2 percent of responding cities have privatized wastewater collection and treatment.

Why are so many communities privatizing their water systems? The simple truth is that it works. Cities across the nation that would otherwise have been forced to burden their taxpayers with more taxes; instead experienced efficiency improvements and customers received better service.

Across the country privately provided water saves customers an average of 25 percent over government-operated water. Inefficiencies of government-owned water companies go beyond cost to consumers. Their operating expenses per connection are 21 percent higher and the public utilities required more than double the number of employees per connection. Accordingly, salaries of public water companies ate up almost three times as much of the operating revenue as the private companies. Public companies also spent nearly double their private counterparts on maintenance.

While water privatization has traditionally focused on construction and operations, we’re starting to see private sector companies coming to the table with financing as well. Over $100 billion has been raised in the global capital markets to invest in infrastructure assets like roads, ports, and water systems. In Pima County, Arizona, officials are currently pursuing a $300 million upgrade of the county’s 50-year-old sewage treatment system using private financing. Prescott-area officials are currently exploring private financing to build a state-of-the-art, multi-jurisdictional water transmission system.

The truth is that politicians – even in relatively taxpayer-friendly cities like Carlsbad – will often choose the path of least resistance (higher taxes) over more fundamental and ultimately better reforms that use free market principles to reduce costs. After all, though privatization has been used across the nation to improve service and cut costs, it is “new” to Carlsbad.

Fortunately, Carlsbad taxpayers have a say in this issue at the ballot box. Rather than blindly going along with a big tax hike that will ultimately harm Carlsbad’s economic competitiveness, voters should demand that their elected officials carefully consider options like privatization.

Paul Gessing is the President of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, 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.

Health Care Taxes

Return surplus to taxpayers, abandon health care boondoggle

Post author By Marina
Post date August 5, 2008

After a great deal of back and forth, it looks like Governor Richardson will call legislators back to Santa Fe after all.

Fortunately, while the Governor had previously stated that health care would be the only topic of discussion during a special session, his stance has softened a bit. Recently he recognized that his plan faces political headwinds saying, “I may not get everything I want” on health care. Clearly, both the public and the Senate remain unconvinced of the Governor’s plan.

Rather than calling the Legislature back to Santa Fe for what would likely be a fruitless special session on health care, Richardson has proposed a to use a portion of the state’s $400 million in “new money” that is available as a result of strong oil and gas revenues. So, what does the Governor’s cleverly-named “CARE” package have in store?

First and foremost, New Mexico families would receive an income tax rebate from the state of between $150 and $75. Those with family incomes below $60,000 and no children would receive $150 while families making more than $70,000 would receive $75. Having children would result in additional refunds with lower income taxpayers receiving more than higher earners.

Instead of returning money to those who earned it (an optimal result), Richardson’s rebate plan re-directs money from high income families to those with lower incomes. At the same time, Richardson should be commended for proposing to refund money to New Mexicans even if it would be fairer if tax rebates were based on taxes paid or were “one-size-fits-all” rebate.

Also, while it is too much to do in a special session, it would be great to dedicate at least some time to studying the possibility of permanent tax cuts, possibly in the income tax. The Rio Grande Foundation outlined such a plan in our study “Stimulating New Mexico’s Economy by Phasing out its Personal Income Tax.” Unlike fleeting rebates, such a plan would give New Mexico’s economy a long-term boost.

Nonetheless, it is still better than more spending.

In addition to rebates, the Governor’s plan includes a one-time tax holiday for the Holidays. The tax holiday would start November 28, 2008 and run through December 7, 2008.

Just like the current back-to-school holiday, clothing, school supplies and computers could be purchased without taxes. In addition, the tax holiday for the Holidays would include Energy Star certified appliances.

Richardson would also expand both the time and the value of items that can be purchased tax-free during the back-to-school tax holiday, not for this year’s “Back to School” but in 2009.

While economists generally see one-time rebates and tax holidays as ineffective economic policy, they are superior to new government programs. Thus, both the rebate and tax holiday plans will not harm our economy.

Unfortunately, Richardson’s plan contains $20 million in new, permanent spending and this, if the Legislature approves of it, could do long-term economic harm.

The Governor would increase the working families’ tax credit by 25 percent and expand income eligibility for child care assistance from 165% to 200% of the federal poverty level. Also, the Governor is proposing a $4 million state supplement to the Low-Income Home Energy Assistance Program (LIHEAP) and an additional $2 million for weatherization assistance and $2 million for high-efficiency appliances for low-income New Mexicans.

It is unclear why the Governor would use temporary “new” money to fund permanent spending hikes. Regardless of the supposed merits of these programs, in today’s uncertain economy, significant new government spending programs – on top of major increases throughout Richardson’s term – could put New Mexico in a difficult position, particularly if oil and gas prices fall.

Hopefully, during the upcoming special session, the Legislature will have time to focus on improving the Governor’s CARE package by making the rebate portion more equitable and eliminating permanent spending. Health care reform and permanent tax cuts should be addressed during a full legislative session.

Tax and Budget Taxes

Tax Hike, Unwise, Unnecessary

Post author By Marina
Post date May 26, 2008

The local politicians are at it again. If Mayor David Coss and Chief of Police Eric Johnson have their way, property taxes will rise and red light cameras will be introduced to Santa Fe roads for the explicit purpose of generating revenue. Both sources of increased revenue are necessary, according to Coss, to add 15 extra officers and three support staff positions for the fiscal year that begins July 1. The cost is estimated at $1.8 million.

The efficacy of such a system is still debatable. Using the system as a cash machine first to justify public safety spending is truly disturbing. No reasonable person would argue against more patrol staff but tax hikes are totally unnecessary. Coss talked about trimming the general fund budget but if public safety is the first priority then existing tax revenue should be enough.

Santa Fe’s trend to spend has been quite prominent in recent years. According to data that is readily available on the City’s website, Santa Fe spent just under $200 million during the 2003-2004 fiscal year. By the 2007-2008 fiscal year spending had grown to nearly $300 million.

Thus, Santa Fe government grew by nearly 50 percent in five years or just under 10 percent annually. Considering that inflation and the City’s population grew far more slowly (an average of 4.5 percent annually over the same four-year period), there is no question that Santa Fe’s government has grown rapidly during the last five years alone.

What does this all mean? For starters, it means that if public safety has become a higher priority, then by definition other areas are somewhat lower priorities. Santa Fe’s budget has grown by more than enough to pay for the added police officers without compromising other areas of the budget.

Certainly, police can be funded out of the existing budget if our political leaders are willing to prioritize. At the same time, the decision of whether to adopt a red light camera program should be based on the support of Santa Feans and hard data showing that they reduce accidents, not the supposed need to boost “tax” revenue.

Albuquerque’s red light program has been repeatedly threatened with closure due to a lack of popular support and the state’s decision to take some of the revenue. A similar plan should not be undertaken here unless community support is strong and revenue is an afterthought and not a justification for the program.

While support for restrained budgets may sound out of place in the “City Different,” we too must compete for businesses and residents against other cities not only throughout New Mexico, but nationwide. In fact, Albuquerque is attempting to become more business friendly by reducing its tax burden after years of tax hikes.

While Santa Fe’s budget has grown at nearly 10 percent annually in recent years, Albuquerque’s budget has grown by less than 5.5 percent over the same time period, despite faster population growth. While we don’t necessarily want to emulate Albuquerque, the fact is that its relatively restrained budget will enable that city to reduce their gross receipts tax by 1/8th cent. The hiring of more police at higher salaries is part of the plan.

Santa Fe is a unique city, but it is not immune from budgetary and economic reality. Rather than once again raising taxes, we must reconsider the core functions of government and allocate resources accordingly.

Gary Miller, a resident of Santa Fe, is a policy analyst with New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, 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.

Economy Tax and Budget Taxes

Stimulate New Mexico Economy by Phasing Out Income Tax

Post author By Marina
Post date May 7, 2008

With economic growth at a standstill nationwide and long-term help from Washington unlikely, New Mexico’s political leaders should consider ways to stimulate economic growth in the Land of Enchantment. The problem is compounded because Congress’s poor excuse for a stimulus will do nothing for the state or national economy. New Mexico should instead consider stimulus that includes both short and long-term, positive policy changes.

The problem with the “stimulus” enacted by Washington is that entrepreneurs and families make their decisions based on future expectations, not just how much money they have in their pockets at a given moment. This means that the basic factors upon which New Mexicans (and other Americans) make their daily economic decisions remain unchanged. The “stimulus” is doomed to failure.

But this does not mean that policymakers are powerless to boost the economy. A new Rio Grande Foundation study, “Stimulating New Mexico’s Economy by Phasing out its Personal Income Tax,” provides a simple plan which would stimulate New Mexico’s economy by building on the state’s recent success in cutting taxes.

Six years have passed and New Mexicans may not remember it, but the state’s top personal income tax rate was 8.2 percent back in 2002. Gary Johnson had attempted to cut this high rate, but Governor Richardson did in fact manage to gradually reduce rates to the point that the top income tax rate is 4.9 percent this year. Not coincidentally, recently-released data from the Bureau of Business & Economic Research at the University of New Mexico show that since these rate cuts began, New Mexico’s income levels have improved from 47th in the nation to 43rd.

A jump of four places may not seem like a great leap forward, but considering that the state’s ranking had held steady at 46th or 47th in the nation since at least 1990, it is a huge improvement in New Mexico’s ranking. It is also a good sign that cutting income taxes can have a dramatic, positive impact on economic growth.

Continuing the success of these tax cuts is the essence of the Foundation’s proposed economic stimulus. Using data based on the economic impact of these recently-completed tax cuts and based on historic revenue growth rate of 6 percent, New Mexico could do away with its personal income tax after four years. This could be done if policymakers in Santa Fe simply restrained annual General Fund spending growth to 4.5 percent for the next four years.

Annual budget growth of 4.5 percent is relatively slow, especially when compared with New Mexico’s 8.4 percent rate of spending growth over the last four years. Nonetheless, it is still possible. In fact, Albuquerque’s annual budget (to use just one example) has grown at just 4.35 percent in recent years. Obviously, restraining spending to 4.5 percent annually for a mere four years in an effort to eliminate the income tax is feasible.

Why would New Mexico wish to eliminate the income tax? Nine states in the nation lack personal income taxes. Not surprisingly, the average resident in each of those states is wealthier than the average New Mexican. In fact, the average resident of a non-income tax state made $7,000 more than the average New Mexican in 2007. What would you do with $7,000 ever year?

Cutting income tax rates, especially if the ultimate plan is to eliminate the tax entirely, will help New Mexico’s economy immediately. After all, particularly in times of weak economic growth, entrepreneurs and employers of highly-skilled workers are looking for ways to cut costs. Taxes are one cost that businesses and workers alike work hard to avoid.

Voters should always be careful when politicians talk of government policies stimulating economic growth. Fortunately, eliminating New Mexico’s personal income tax returns resources to productive uses, thus allowing each of us to stimulate the economy more effectively than any other decision made in Santa Fe (or Washington) possibly could.

Tax and Budget Taxes

Heather Wilson, Tax-and-Spend Republican

Post author By Marina
Post date October 6, 2007

Heather Wilson, a recently declared candidate to replace retiring Sen. Pete Domenici, is a so-called “moderate Republican.” Unfortunately, judging by her track record and the most recent congressional ratings from the National Taxpayers Union, outside of a few Northeast Republicans (Chris Shays, Sherwood Boehlert), Wilson is the most liberal Republican in the House of Representatives.

And if she winds up in the Senate, she may top Maine’s Olympia Snowe and Susan Collins in the Republicans-who-vote-liberal category.

Wilson has shown recently that she is no longer content to merely vote as a liberal. Instead, she is going to lead other moderate Republicans against their own president’s attempts to restrain federal spending. Her role in pushing for an override of President Bush’s S-CHIP veto is a case in point.

Wilson was one of 17 Republican House members to send a letter to House Speaker Nancy Pelosi, a California Democrat, asking her to allow a vote on the Senate version of the S-CHIP bill. She then proceeded to lobby her fellow Republican colleagues on behalf of the $35 billion tax-and-spending increase.

The proposal that passed both Houses, which undoubtedly will be resurrected with a number of tweaks designed to attract additional moderate Republicans, extends eligibility to children from families with incomes that are two-to-three times the federal poverty level. That makes children in families of four with incomes between $40,000 and $60,000 eligible for S-CHIP.

Since the median income for a family of four in New Mexico is about $51,000, this expansion will land directly on middle-class New Mexico families. Although the state’s income levels are among the lowest in the nation, large numbers of middle-class families in other states also would qualify for the expanded S-CHIP program that Wilson supports.

Most of the children in these families, however, are already covered by private health insurance. This expansion therefore invites the parents of these children to drop their private insurance and shift that cost to the taxpayers. While it is uncertain exactly how much private insurance the expansion of public coverage will crowd out, the Congressional Budget Office projects that if the program is expanded, 25 to 50 percent of new S-CHIP participants would be children who already had private insurance.

Families with incomes that are two-to-three times the federal poverty level manage to buy their own housing, food, and transportation, and most buy health insurance for their children. But the S-CHIP expansion replaces such personal responsibility with a $35 billion taxpayer subsidy.

That $35 billion cost is even an understatement. While the CBO scores its $35 billion S-CHIP expansion, paid for with a 61-cent-a-pack increase in federal tobacco taxes, as revenue-neutral over five years, the legislation Wilson and her Democratic allies had supported uses a transparent budget gimmick — an absurd “cliff” in the funding level — to make the legislation look fiscally sound past the five-year mark. This is both fiscally and morally irresponsible.

So why is Heather Wilson — R., N.M. — supporting this exceedingly liberal measure and working to override the president’s veto?

Some would argue that since Wilson won re-election by a mere 500 votes (over former attorney general Patty Madrid) that she has to be allowed her “independence.” That may be true, but it is equally true that when Republicans advocate bigger government and tax hikes, they hurt themselves politically.

Rep. Wilson ran for office and won as Pete Domenici’s protégé. She may shift rightward in the Senate, but her track record is that of a big-government Republican.
— Paul Gessing is president of the Rio Grande Foundation.

Tax and Budget Taxes

Congress to Resurrect Harmful Tax Hikes

Post author By Marina
Post date September 4, 2007

There are two major proposed tax hikes that will be considered in Congress when it returns to Washington to resume debate on an energy bill. If enacted, these tax hikes would have a major negative impact on American and New Mexican consumers — and on our state economy.

Although most Americans justifiably are wary of raising taxes, these proposals have been packaged so as to produce the most feel-good sound bites. That said, even the simplistic sound bites defending these taxes have scarcely been necessary in New Mexico, so far, since they have received little attention here. This, despite the fact that these taxes — which would be levied on the nation’s oil and gas producers — would disproportionately affect New Mexico’s economy.

One of the proposed tax amendments would eliminate the foreign income tax credit for U.S. companies. This may sound like a small issue, but if this amendment is enacted, U.S. companies would have to pay double taxes on the oil they produce outside the United States.

Currently, U.S. companies drilling elsewhere pay taxes in the country in which they operate and get a credit for that on their U.S. income taxes, so they do not have to pay double. For whatever reason, a sizable number of senators, and the pro-tax interest groups, want to end this reasonable exemption.

Passing this amendment would mean that American companies would be placed at a competitive disadvantage when operating in foreign countries. It is hard to believe that at a time when “energy security” is such a hot topic that we would be passing laws to benefit foreign oil companies at the expense of U.S.-based producers.

The other proposal would increase by $30 billion the tax on companies operating in the Gulf of Mexico, and virtually all of the Gulf operators are U.S. energy companies. This is big money even by Washington standards. The proponents of this $30 billion tax want to redistribute it in the form of subsidies to “renewable” energy companies.

Even if one were to advocate for renewable energy, it is foolhardy and improper to have the U.S. taxpayers serve as venture capitalists via the tax code for unproven technologies.

Although each of these tax hike proposals was beaten back in votes on the Senate floor earlier this summer, they are almost certain to be brought back up again when Congress returns from its current August recess. Pro-tax advocates are now going public with misleading ad campaigns.

New Mexico remains a leading producer of oil and gas in the entire nation. Few New Mexicans know that about half of our General Fund budget comes from taxes on our oil and gas companies. That lack of understanding is probably based on the fact that the majority of the New Mexico population lives along the central corridor of the state while the energy areas are 200 miles away or more in the southeast and northwest.

Despite our relative ignorance, New Mexicans must become engaged. After all, our senators, Jeff Bingaman and Pete Domenici, hold the two most powerful posts on energy policy in the Senate. Although often in agreement, they have differed on these proposed taxes in the votes that happened this summer, with Bingaman voting for the tax hikes and Domenici voting against them.

New Mexicans should inform themselves about these measures, and the impact they will have on our country and our state and all consumers. It is almost a certainty that these taxes will be offered again, and the pro-tax interest groups are pressuring senators, who have opposed the taxes so far, to vote for these ill-considered measures.

Paul Gessing, of Albuquerque, 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.

Economy Research Taxes

Cut Taxes and Reduce Spending to Fight Poverty?

Post author By Marina
Post date April 4, 2007

Conventional wisdom is that bleeding-heart liberals care deeply about poverty while conservatives and libertarians would let children and the poor starve in the streets. A new study by Dr. Matthew Ladner and I that was published recently by the Rio Grande Foundation should dispel this notion and add weight to the argument that limited government is a better tool for lifting people out of poverty than bigger government.

Stepping back a bit to take in a broader world view, the case for limited government as a tool for reducing poverty has already been made on a global scale. The Cato Institute, Heritage Foundation, and a handful of other think tanks produce annual indices that clearly show the superior economic performance of nations with relatively limited governments like the United States, New Zealand, and Hong Kong when compared to the unlimited government and relatively impoverished nations of North Korea, Cuba, and Zimbabwe.

Those who support big government offer any array of excuses to justify the large gaps in living standards among free and un-free nations; our study demolishes these arguments by focusing narrowly on the relative performance of the 50 states on the issue of reducing poverty during the 1990s. Thus, it is more difficult to blame the poverty gap on cultural or resource differences.

The numbers are striking and clearly show that taxes and spending have a tremendous impact on poverty, but it is not the necessarily the impact that those who would spend ever more taxpayer money on government poverty programs will like. For starters, we wanted to explore the impact of taxation levels on poverty. So, we chose the 10 highest tax states and compared their performance over the decade to the 10 lowest-tax states. The low-tax states saw a decline in poverty rates more than 9% while poverty rates actually increased in the high tax states by approximately 2%.

Similar results were found when we looked only at childhood poverty. In the high tax states, poverty rates declined by a modest 2.8% while in the low tax states poverty rates dropped by a robust 10.3%. In a similar vein, childhood poverty in low tax states dropped by 9.26% while childhood poverty in high tax states actually rose by 3.4%.

The relative success of low-tax states in reducing poverty is somewhat unsurprising. Sure, less taxation spurs the economy, thus creating jobs and economic growth. But, what about spending? This time the authors compared the 10 states with the lowest per-capita spending during the 1990s with the top 10 states in per capita spending. In the low-spending states, overall poverty rates declined by a robust 8.42% while the big-spenders not only failed to reduce poverty rates, but they actually suffered an increase in poverty rates of 7.6%.

It is worth noting that New Mexico is among the top ten states in spending per capita and it ranks just behind Louisiana and Mississippi with one of the highest poverty levels nationwide. It is also noteworthy that Colorado led the nation in reducing childhood poverty during the 1990s while it had the fourth best record of reducing overall poverty. Colorado’s Taxpayers’ Bill of Rights was enacted in 1992 and implemented in 1993, so there can be no doubt that the law’s tax and spending reductions had a salutary impact on poverty, not the “doom-and-gloom” impact that opponents expected.

New Mexico Gov. Bill Richardson proposed (and received) an 11% budget increase for FY 2008. Not coincidentally, Republicans in New Mexico’s Legislature this year proposed a Constitutional spending limit amendment that is similar in many ways to Colorado’s. The path out of poverty is clear, but will New Mexico take it?

Mr. 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.

Dr. Ladner is vice president for research at the Arizona-based Goldwater Institute and is an adjunct scholar with the Rio Grande Foundation.

Economy Tax and Budget Taxes

NM’s High Taxes, Big Government Gives State Low Marks

Post author By Marina
Post date October 1, 2006

We all know that New Mexico has historically lagged behind much of the nation. A just-released study by the U.S.-based National Center for Policy Analysis and the Canada-based Fraser Institute may provide the reason: New Mexico government burdens its citizens with some of the highest taxes and regulatory burdens of any state or provincial government in all of North America.

The study — which took into account such factors as “size of government,” takings (in the forms of property and taxes), and labor market freedom — gives New Mexico low marks. The state’s overall ranking in the study was 50th out of 50 states and 10 Canadian provinces; only West Virginia’s abysmal scores prevents New Mexico from being the least economically-free state in the nation.

Making the findings even starker was the fact that our neighbors performed so well: Colorado came in 3rd, Arizona was 14th, and Texas was 7th.

Two Canadian provinces (Alberta and Ontario) also outscore New Mexico, despite more burdensome taxes and regulations imposed by that nation’s government.

New Mexico politicians, rather than lowering taxes, protecting private property, and protecting worker freedoms, have too often decided to expand government. We have more state and local employees per capita than all but two states, while at the same time two federal tax dollars flow into New Mexico for every dollar we send to Washington, (a higher ratio than any other state). Whether it is federal or New Mexico tax dollars we are spending, our over-reliance on government hurts our economy and reduces our standards of living.

As Election Day and the 2007 legislative session grow nearer, both voters and politicians need to understand that low taxes, strong property rights, and a free labor market allow individuals and businesses to create wealth and raise living standards.

New Mexico must adopt these principles or continue to fall further behind.

Paul Gessing is the President of New Mexico’s Rio Grande FoundationThe Rio Grande Foundation is an independent, 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.

Research Tax and Budget Taxes

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

Post author By Marina
Post date June 14, 2002

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.