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