Solution for New Mexico Budget Is Spending Cuts, Not Tax Hikes
Guest-blogging on the liberal Democracy for New Mexico Web site, New Mexico State Sen. Linda Lopez wrote that her solution to the state’s budget problems is to "return to pre-2004 tax rates to fix the budget shortfall."
A much better solution is available. Rather than raise taxes back up to pre-2004 levels, the legislature should lower spending back to pre-2004 levels.
It’s a novel idea, I know. But there is no good reason why taxpayers should be punished for the legislature’s addiction to spending and the unwarranted expansion of government during the state’s economic boom years. New Mexico cut taxes in 2003 and revenue rose as the state’s economy blossomed.
But between 2004 and the projection for 2010, the state’s spending budget increased from $4.1 billion to $5.5 billion. That’s a 34.1 percent jump in spending since 2004. This makes the current budget woes look more like a spending problem than the "revenue problem" Sen. Lopez wants you to see.
Lopez also claims the 2003 tax cuts had no positive effect, but the state’s economy says otherwise. According to the Bureau of Economic Analysis, an agency of the U.S. Department of Commerce, New Mexico’s GDP grew faster than the nation’s over the period 2005-2008, 6.5 percent versus 5.6 percent. The Bureau of Labor Statistics has the state’s unemployment rate at 7 percent, far lower than most other states.
Economic growth increased the state’s tax revenues without doing harm to New Mexico’s tax advantage over other states. According to the Tax Foundation, New Mexico’s total tax burden is the 11th lowest in the nation. Sen. Lopez wants to give up that advantage by repealing the 2003 tax cuts.
The fact is that New Mexico was much better positioned economically after the 2003 tax cuts than before, especially compared to states that have since increased taxes on their most productive citizens. California, for example, has been increasing its top marginal tax rates and capital gains taxes in an effort to bring in more revenue—succeeding only in creating a huge exodus of its most productive workers and entrepreneurs.
In Rich States, Poor States, economists Arthur Laffer and Stephen Moore point out how California’s tax hikes helped create huge budget deficits before such deficits were common. "When California faced a $14 billion deficit in 2003, a major cause of this was ‘millionaire migration’ due to the high top income tax rate (9.3 percent). Out of the 25,000 or so seven-figure-income families, more than 5,000 left in the early 2000s, and the loss of their tax payments accounted for about half the budget hole."
Even after this initial exodus, California continued to indulge its insatiable spending habits by overtaxing small segments of the population, especially the rich. Now the once-thriving state sits on the edge of financial ruin and is experiencing the worst budget deficits in the country.
When Sen. Lopez says New Mexico should return to its pre-2004 tax rates, she is suggesting the state follow California’s lead ... over a fiscal cliff.
Legislators who really want to fix the state’s budget must consider fundamental budget reforms, such as reforming the state government workforce and limiting government to its core responsibilities. Until the New Mexico government starts addressing how it can become more efficient and spend less money, it won’t matter how many tax cuts are rolled back—because for Sen. Lopez and too many of her colleagues, there is no limit on how much government should do and spend.
John Nothdurft (jnothdurft@heartland.org) is the budget and tax legislative specialist for The Heartland Institute.
This Op-ed was originally published in the New Mexico Independent.
