Return surplus to taxpayers, abandon health care boondoggle

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.

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.