News and Views, Volume 2 Issue 1, Jan-Feb 1999
Governor's Policy on Taxation is a Good One Legislators better heed his Policy Leadership
By M. Gene Aldridge
President, NMIRI
Governor Johnson's tax policy is a good one for New Mexico and its future. If you believe that lower taxes produce employment and economic growth, then most legislators will not have difficulty with the current tax policy and economic growth policy of Governor Johnson. The New Mexico Independence Research Institute, Inc. (NMIRI) has been working on tax policy for the state of New Mexico for over 18 months now. We are non partisan and believe that lower taxes mean prosperity for all New Mexicans. We have conducted research projects on marginal tax rates, compared our tax burden in New Mexico relative to other neighboring states, reviewed the research on the relationship of economic growth to tax policy of states, created an economic benchmark premier forecast for New Mexico comparing New Mexico with the region and the nation, and evaluated the fiscal policy of New Mexico and other states relative to state spending and tax revenues. NMIRI is the only private think tank in the state that is not beholden to government for our income.
Our assessment is that the Governor is on the right policy track as it relates to tax policy in New Mexico.
The policy goal is to reach an individual income tax top rate of 3.5 percent over the next two to three years. In addition, the Governor wants to keep spending in the state to a level that is reasonable as it relates to the lower tax levels. As a policy goal this is an excellent idea because it will mean that New Mexico can become more competitive with respect to income taxes relative to our neighboring states. What alarms us at NMIRI, and other private sector groups around the state, is what we are hearing from legislative leadership about these excellent policy goals. Here are some examples from the leadership followed by NMIRI's policy option alternatives. See what you think about these policy ideas.
1. Legislative Leadership on taxation and economic policy: "We must take care of people, therefore government must spend more and more money to take care of our constituents."
NMIRI Alternative Policy: If we really care about people in New Mexico, especially the poor among us, we would create an economy where people can obtain a good job... we would lower taxes because we know that lowering taxes results in increased economic activity and creates more and better employment. If we really cared about the citizens of New Mexico we would create an environment where corporations are cheerfully invited to come here and create the employment we need...albeit, we could then choose corporations and businesses that promote the quality of life values which we embrace. In essence New Mexico, via economic policy, would grow our economy in such a way that reduces the high poverty rates. Since New Mexico is the poorest state per capita, it is obvious that the private sector and the public sector must try new methods of transforming the economy. Government growth is not the way. The Governor is taking the right direction by lowering taxes and spending. It is time that the legislature embrace the transformation of our economy so that we provide economic freedom and prosperity for our citizens.
2. Legislative leadership on taxation and economic policy: "We must have minimum wage in New Mexico and it should be increased. We just want the working stiff to have a decent job at a decent wage."
NMIRI Alternative Policy: If the jobs were in the marketplace and taxes were differentially lower as compared to our neighboring states, corporations would be hiring people at much more than minimum wage. We need to create a market that is conducive to better and higher paying jobs through economic policy, not by passing legislation on minimum wage. Employment in manufacturing is still about 7 percent of our total employment base for NM. Most states which have a vital economy with good wages have at least 14 percent of their employment base in manufacturing. Our government spending on employment in NM is too high. In some areas of the state, 66 percent of the economic base for employment is government sector employment. Overall, about 25 percent of our total employment base is government driven. That is too high. We have an upside down economy that affects wages in the private sector. Minimum wage limits will not solve this problem.
3. Legislative leadership on taxation and economic policy: "There are so many poor people in rural communities in New Mexico, that we must have government take care of them. Somebody has to look out for the poor people in New Mexico."
NMIRI Alternative Policy: If the tax climate in New Mexico were not differentially uncompetitive with respect to our neighboring states, poor people and rural communities would benefit from economic development and growth in higher quality jobs. Once New Mexico has a compatible tax climate, this state needs to decentralize the control of educational money that is disbursed in this state. Local control over taxation and economic development that is linked to statewide cluster industry analysis can provide a marketing strategy for promoting state economic development by the private sector. We also believe that linking tourism and economic development into one department will be productive for local constituents provided that economic development for each region is the priority...tourism must be the result of effective economic development overall.
4. Legislative leadership on taxation and economic policy: "The public sector spending by government drives prosperity for everyone. The history of New Mexico is based upon government research development and military spending. This has produced a good employment base for New Mexico."
NMIRI Alternative Policy: It is true that New Mexico history for economic development was based substantially on government spending at all levels. However, government spending is in recession and we cannot rely on public sector spending to grow our economy. This is very dangerous for our economic future. It is imperative that we wean ourselves off of government spending and create a private sector economy in New Mexico. If previous policies for high government spending would have worked, why are there so many poor people in the state of New Mexico? The private sector drives prosperity . . . economic freedom and prosperity results when there is less spending and coercion by government. The private sector responds to market forces especially when individuals are allowed to trade with one another in an unregulated environment. All parties are better off under this approach to public private prosperity. In fact, increased revenues often accrue to those state governments where marginal tax rates are reduced as NMIRI has demonstrated in its research this year. We know that the heavy burden of taxes and high government spending clearly suppressed economic growth as evidenced in the Southern states by the Federal Reserve studies in Atlanta. (See NMIRI's analysis of these studies as it relates to New Mexico.)
As a matter of tax policy the Governor is right to move toward lower income tax. He is right again to lower spending and make fiscal policy of the state consistent with lower taxes. This is a move in the right direction, but it will take much more leadership on the part of the legislature and the Governor in order to provide the economic transformation for the state of New Mexico. Here are the policy goals which we believe at NMIRI stand the test of research and pragmatic application for New Mexico.
1. Lower the top rate on income taxes to 3.5 percent over the next two years.
2. Index the income tax (this prevents bracket creep) to the cost of living and allow for the first $12,000 of income to be tax free for all citizens of New Mexico.
3. Work toward an elimination of Gross Receipts tax on services because this makes us uncompetitive with other states in our region. This policy should be crafted with local governments so that they can create their own revenue tax streams at the local level with their own constituents in each region. This will divest the state of too much fiscal control over the lives of local governments. The best governments are those that control at the local level.
4. Reduce capital gains tax to 18 percent (1.4 percent of normal income) from its current 100 percent rate immediately. This will have the effect over time of increasing the revenues on capital gains in New Mexico because fewer people will be less likely to run to other states where capital gains tax is differentially lower. It is outrageous that someone has to pay 8.2 percent (capital gains is treated as normal income) currently. It forces individuals to flee our state with their capital gains.
5. The state must move to a supermajority (2/3) vote on all tax increases. A simple majority vote for increases on taxes is not working in New Mexico. It is too easy for legislators to increase our taxes without thoughtful and provocative dialogue with the constituents. Having a supermajority vote increases the likelihood that statewide debate will temper future tax increases and will allow for tax increases only when they are essential to overall economic policy.
In Summary
The modern state must be based upon reason, but often we do not take power
into account. The dream of education in democracy was that reason would liberate
us from economic coercion, superstitions, ignorance and most of all tyranny
by our leaders. But reason alone will not produce economic freedom for the citizens
in New Mexico. The global economy has a new basis of power that is knowledge
and information. In this new global economy some people stand above others in
knowledge and authority to control vast institutions for spending. We have allowed
politicians to create a power base where they control the knowledge and information
to the exclusion of the citizens of New Mexico. This has created a very unhealthy
dependence rather than foster independence and prosperity for citizens. This
situation creates forms and uses in government that have narrower purposes for
men and women; their interests even shape what is evaluated as knowledge. Higher
education, as part of government, has become less objective and less able to
evaluate fairly the economic conditions of New Mexico because it too holds power
over information and knowledge in ways that define the economic climate in New
Mexico as it wants it to be from those that pay for their services as government
employees. This is very dangerous for economic freedom of all citizens in New
Mexico as it relates specifically to economic policy. Worst of all the media
pretend not to care by offering up the same pap from these unfair sources in
higher education without the additional dialogue from other sectors of the economy.
This not only limits debate, it fosters economic dependence for all citizens.
In New Mexico, we even have publishers who believe that our tax situation is
just moderate, but supply absolutely no data to support this claim! Nor do they
seek other opinions! We must all work together, fairly and objectively, to create
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