TAXES AND ECONOMIC DEVELOPMENT IN NEW MEXICO

February 25, 2013 — Leave a comment

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]

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