Spending Limit Needed to Stabilize NM Budgetary Growth

Government spending in New Mexico is out of control. Between FY 2007 and FY 2008, the state’s general fund grew by a whopping 11 percent. High oil and gas prices created a surge in revenue which spurred this growth. However, lawmakers are quickly discovering that such rapid budgetary growth is unsustainable over the long term. In fact, tax hikes for transportation are currently being discussed.

Sen. Kent Cravens (R-Albuquerque) and House Minority Leader Tom Taylor (R-Farmington) have introduced legislation that, if enacted, could stabilize spending growth in New Mexico and prevent these surges in the size of government. The idea, known as the “Taxpayer Protection Act,” would constitutionally limit the growth of New Mexico’s General Fund to 3.6 percent annually plus the rate of population growth.

Recently, I had an opportunity to testify before the Legislative Finance Committee of New Mexico’s Legislature on behalf of the Taxpayer Protection Act. At this hearing I, along with Rio Grande Foundation President Paul Gessing, faced hostile questions from several legislators. Some legislators claimed that under such a law they would be unable to address important problems in the state. This is simply not true.

First and foremost, it is important to point out that the limit established by the Taxpayer Protection Act, would allow state government to continue to expand in real terms. With inflation rates holding steady at about 2.5 percent annually (well below the 3.6 percent limit prescribed by the Act), government in New Mexico would continue to grow on a yearly basis.

Unlike the current mentality that prevails among legislators in New Mexico (and many other states), however, government would be required to grow at a consistent and limited rate, much like your family’s budget. In other words, government could still grow, but the Taxpayer Protection Act would prevent large and unsustainable spending increases. Better still, with a known limit set in advance, legislators would be forced to do something that is all too rare where spending growth is not limited: prioritize.

The effectiveness of constitutional spending limits has been demonstrated in other states.  Currently, thirty states have some kind of fiscal limit in place and the most well known of these limits, Colorado’s Taxpayer’s Bill of Rights (TABOR) has enjoyed considerable success at limiting state government.  TABOR’s requirement that surplus revenues be returned to taxpayers resulted in $3.2 billion in tax rebates between 1997 and 2001.

Not surprisingly – at least to those versed in economics – Colorado led the nation in economic growth from 1997 to 2001. Washington State’s I-601 and California’s Gann Limit are other examples of state spending limits that have enjoyed success in limiting government growth. A similar approach could certainly work well in New Mexico.

While I think it is a good place to start the discussion, I am not arguing that the proposed limit of 3.6 percent plus inflation is the only limit that would work for New Mexico. That said, my experience in studying state budgets tells me that consistent 11 percent increases in state spending are simply not sustainable.

Unfortunately, politicians, when left to their own devices, have little incentive to exercise fiscal restraint. Unless limited by the constitution, legislatures typically spend whatever revenues the government receives. As such, constitutional spending limits like the Taxpayer Protection Act are the best strategy to bring about some much needed fiscal discipline in Santa Fe.

Michael J. New is an Adjunct Scholar at the Cato Institute and an Assistant Professor at the University of Alabama. Recently, he testified in New Mexico on behalf of proposed tax and spending limits.