Archives For February 2013

Things are not good in the New Mexico economy. The job situation is desperate and getting worse. Worse, ten years of reduced state tax revenues from tax cuts is limiting the state’s ability to respond in a compelling fashion.

What is being proposed? 

The Governor proposes the New Century Economy Jobs Agenda: a corporate income tax cut, infrastructure money for local economic development, re-prioritization of capital outlay projects plus continuing the Main Street and job training incentive programs.

Democratic legislators are pushing for an increase in the minimum wage, an increase in the film production credit, a $97 million public works program, a 1% pay raise for state workers and creation of a governmental jobs council.

Options are limited

These economic development efforts don’t seem equal to the state’s dire situation.

Yet can we criticize these choices by policymakers when the state has relatively little General Fund revenue available for economic development?

This shortfall is not just because of the economic downturn. It’s because over the last ten years taxes have been reduced in the hope that the lower tax burden will aid the state in luring out-of-state businesses to New Mexico.

Gov. Richardson’s started down this path in 2003. He pushed a number of tax cuts. But the most far-reaching were exempting food and some medical services from the gross receipts tax, reducing tax revenues by about $270 million in 2012. He also lowered personal income taxes by reducing the maximum rate from 8.2% to 4.9%, reducing state revenues by more than $400 million annually.

By 2010 it was clear that with the downturn and the tax cuts, the state couldn’t balance its budget. Richardson agreed to some tax increases including minor increases in the gross receipts tax and personal income taxes that increased revenues by $170 million. He also vetoed a bill to reinstate the tax on food.

Though the half billion dollars in tax cuts over ten years were intended to make the state more attractive for businesses to locate operations here, the effort has shown little success.

Notwithstanding, Gov. Martinez is following the same path.

Last year she secured an anti-pyramiding gross receipts tax cut projected to cost $91 million annually. This year, she is proposing a corporate income tax cut in this legislative session whose full cost would be $255 million each year.

Will another $350 million in tax cuts make a difference in New Mexico’s ability to attract new business relocations? Yes, the business climate is improving but can New Mexico compete against states with the ability to offer greater incentives or have superior geographic locations?

The publication Governing carried a recent article about state economic development incentives in which one expert said that tax incentives are only part of the picture in what appeals to relocating businesses. Chris Lafakis, a Moody’s analyst who helped compile that firm’s Cost of Doing Business Index, says in this article that states with low tax burdens often lose out to others with higher burdens. Each state has its own attractions. Another commentator suggests states consider at what cost to the state are relocation incentives being given.

That is what New Mexico citizens should ask themselves. We’ve been at this tax cutting for some time with not much to show for it. Would it be better if we had spent these hundreds of millions each year on a more robust economic development effort focused on existing employers and job training for local workers? On improving our early childhood, K-12 and post-secondary education systems? On addressing the state’s $1.5 billion unfunded road construction needs?

Is it time to change direction?

Are we chasing the right rainbows?

[This post originally appeared in the Albuquerque Journal on February 25, 2013]


The economic situation in New Mexico is astonishingly bad. There’s not a lot of vigor to the proposed legislative solutions but it’s also true that state revenues are so diminished, options are limited.

Yet there are a few useful things that could be done in this legislative session.

The Governor’s Agenda

There’s little of consequence in the Governor’s New Century Economy Jobs Agenda beyond the proposed corporate income tax cut. This cut would make it easier to attract out-of-state corporations to locate business facilities in New Mexico, say its supporters.

But adoption of this measure would reduce annual state revenues by $255 million. This is on top of the anti-pyramiding tax cut for manufacturers the Governor requested last year. That tax cut is projected to reduce tax revenues by $91 million each year, but likely to be pared back as its effect was originally underestimated.

These tax cuts represent a continuation of policies instituted under former Gov. Richardson whereby the state reduces its gross receipts and income taxes in order to make New Mexico more “business-friendly”. The major Richardson tax cuts presently cost the state $500 million each year. The results achieved by these tax cuts to date are minimal but even as each tax reduction fails to produce the promised results, it seems another tax-cutting idea is right around the corner.

If these new tax cuts are approved by the Legislature, how to make sure the state can still balance its budget as the tax cut takes effect? Keep in mind that revenues from the current oil and gas boom are propping up the budget now and that revenue could go away in a heartbeat, just as it has several times in the past 20 years.

The simple answer would be to identify a replacement revenue source and the first place to look would be the personal income tax.

Reducing the maximum personal income tax rate from 8.2% to 4.9% under Gov. Richardson was done so inartfully that a married couple with $24,000 in taxable income now pays the same marginal tax rate as a couple with $250,000 or more. The progressivity of the income tax rates that formerly existed was able to offset the regressivity of the gross receipts tax. That balancing no longer exists.

A new income tax bracket could be created at say $150,000 of taxable income to be taxed at a tax rate slightly higher than 4.9% that is sufficient to replace the revenues lost by the new corporate income tax cut and the other tax cuts sought by the Governor. If her tax cuts work, the state’s economy will pick up and everyone will be happy.

Public Works Projects

The best thing government can do to create jobs is fund construction of needed public works projects. This would be a boon to the beleaguered construction industry. Assuming it has identified the right mix of projects, House Bill  337 providing for $97 million in public works projects to be financed by Severance Tax bonds makes good sense.

New Mexico’s Roads

It would be great if something could be done about the dismal state of our roads and at the same time create jobs. The New Mexico Legislative Finance Committee budget report says that New Mexico has at least $1.5 billion in unfunded road construction needs. Fixing more of these roads and bridges than is now possible would create jobs and the resulting expenditures would add to local tax revenues.

But that would require a General Fund appropriation.

That is because the state’s Road Fund is vastly diminished and even routine road maintenance is a challenge. The Fund’s woes have several causes. One is that Governors Johnson and Richardson both chose to issue bonds secured by New Mexico’s future state and federal highway funding. This enabled them to spend future revenues to build roads chosen by them during their terms of office.

Now the state has some awfully bad roads but much of its present and future road funding has already been spent. The LFC reports that a full 20% of future highway funding is currently needed just to make payments on the bonds issued under Gov. Richardson’s GRIP program. Wisely, such bonding has been discontinued by the current administration but the outstanding bonds won’t be fully paid until 2027.

Another drain on the Road Fund is the legislation that allowed Indian tribes to sell gas on the reservation and retain the gasoline tax for themselves rather than passing it to the Road Fund. This costs the Road Fund as much as $10 million each year. Tribes are now seeking new legislation giving them the right to also sell diesel and other fuels that would have an even more serious effect on the Road Fund. The Legislature should reject the proposed expansion and consider curtailing the existing gasoline sales program.

What else could be done to increase funding for our roads and highways? A long-time problem is that the state gasoline tax is very low, in fact lower than that of 42 other states, and hasn’t been raised in 20 years. Yet gasoline taxes are unpopular. The state could use other revenue sources to fund road costs, including an increase to the gross receipts tax with revenues dedicated to the Road Fund. This course was recently followed by the state of Virginia. Gov. Martinez has vowed there will be no new taxes.  But without new taxes, tollroads, or a magic lamp and a genie, the General Fund is the only potential source of additional funding beyond the Road Fund to repair roads and bridges.

Healthcare Investments

The Governor wisely chose to accept the federal Medicaid money under the Affordable Care Act. Nothing else the state could do will benefit the state’s economy more in the short run than having billions of federal dollars spent on healthcare and resulting healthcare infrastructure. It will also add immeasurably to the future well-being of the more than 400,000 New Mexicans without healthcare insurance.

Concerns remain that the state lacks sufficient infrastructure and healthcare workers to handle the increased caseloads. At the same time, the Governor has blocked for several months the construction of a new $146 million UNM hospital. The issues raised, though in constant flux, never seem to be substantial. UNM’s Emergency Rooms are overloaded for lack of hospital beds. UNM already has the construction money in hand so state or local funding is not the issue.

The construction of the new hospital would instantly create 1000 badly needed construction jobs lasting 22 months, not to mention the new healthcare jobs when the facility opens. There would also be significantly increased tax revenues from both the construction and the operation of the hospital.

The delays to this project are hurting everyone.

A Pay Boost For State Workers

A pay boost for all state workers for the first time in four years is more than appropriate. While it’s fashionable to beat up on public employees, there are many capable and dedicated state employees who will leave government if their salaries remain flat. The extra money these employees receive from a raise would likely be spent and come back into the economy quickly. The House Appropriations and Finance Committee’s budget provides for a 1% increase for all employees.

Technology-based Economic Development

One of New Mexico’s principal long-term economic development strategies has been to take advantage of the science and engineering capabilities of its national labs and universities to foster tech-based industries here in the state.

The number of technology-based startup companies in New Mexico has grown much faster than many realize and they represent a promising source of tomorrow’s jobs.

For twenty years, a primary tool used by the state has been to make investments from the Severance Tax Permanent Fund in qualified local venture capital funds. These funds in turn finance promising local start-up companies. But the program has been inactive since the Martinez administration came into office and is only now resuming activity. Meanwhile, significant momentum has been lost because even successful startup companies need a steady stream of financing in their early stages to remain viable. Getting this program in back operation with vigor makes great sense.