New Mexico-STAMP
Measuring the Effects of
Tax Changes in New Mexico Using the
New Mexico State Tax Analysis
Modeling Program
With a Forward by
Harry Messenheimer, Ph.D.
Senior Fellow, Rio Grande Foundation
The following study of potential tax reforms in New Mexico is best understood
as a complement to Rio Grande Foundation's study last fall: New Mexico
2000: A Study of Its Policies and Economic Health (that study may
be found on our web site www.riograndefoundation.org). That study examined
the relationship between economic freedom and prosperity by interstate
comparisons over 20 years. The findings were not happy for New Mexico:
If New Mexico now had state and local governments that were only slightly
more coercive than the lower 48 average, then the median income for 4-person
families is estimated to be $8,303 higher and per capita income is estimated
to be $5,476 higher than they are today. In addition, measures of
income growth over the last 20 years indicate that New Mexico is last.
As part of last fall's study I examined one of the high visibility constraints
on economic freedom: taxes, and that part is summarized herein to set
the stage for Beacon Hill's tax model. How does New Mexico compare to
other states with respect to taxes? Because of the bewildering array of
tax rates, bases, exemptions and deductions that question is difficult
to answer. One intuitively appealing answer (because it gives some sense
of the ability to pay) is total tax revenue collected as a percentage
of income. Figure one displays New Mexico's position in 1998 relative
to the U.S. average and states in the region.
Figure 1: Comparison of state and local taxes collected per $1000
of income
Tax rates modify behavior, so it is also important to compare rates for
major sources of tax revenue. Figure 2 compares state-component rates
(and revenue collected) for sales and gross receipts taxes for states
in the region:
Figure 2: Regional comparison of tax rates and revenue collected for
gross receipts and sales taxes: 1995
The top two panels picture alternative tax rates among states
in the region for the sales and gross receipts tax for services and goods.
New Mexico taxes services, and other states do not. So, the relevant tax
rate shown in the upper left panel is 5% for New Mexico and zero
for all others. New Mexico and the other states tax goods, so the relevant
tax rate shown in the upper right panel is 5% for New Mexico and ranges
from 3 to 6.2% for the others. New Mexico taxes goods at a rate
a little above average for the region. Texas is often cited as having
a very high sales tax rate compared to New Mexico. Notice that is not
really true: Texas may exceed New Mexico for the state-wide-tax on goods
(6.2% to 5%), but New Mexico far exceeds Texas for the tax on services
(5% to zero).
The other major source of revenue is the individual income tax. Figure
3 compares New Mexico's top tax rate (and revenue collected) to that of
regional states. Notice that New Mexico has the highest rate in the region.
With that summary of how New Mexico's major taxes compare to other states,
it is worth pointing out an important difference in interpretation between
my earlier study and the one that follows. My earlier study was concerned
with long run adjustments: how outcomes in states are affected by major
differences in economic freedom (taxes included). The study that follows
derives its estimates of tax reform consequences from a shorter run look
at how New Mexico has adjusted year-to-year to relatively small changes
in tax rates given overall differences in economic freedom across states.
Figure 3: Regional comparison of income tax margins and revenue collected:
1995
With that in mind, the reader should recognize that any one of the major
kinds of tax reforms assessed by Beacon Hill Institute would have an effect
on expectations about the economic climate in New Mexico. As long
as major tax reform is credible enough to be considered durable, so that
New Mexico would not be expected to renege on it, then entrepreneurs and
risk takers would be attracted to our state. And in that sense, Beacon
Hill's estimates of tax reforms' revenue impacts are way too low. The
problem is that we do not know how rapidly the revenue increasing, longer
run adjustments would take place. The actual pace of adjustment would
be dependent on the credibility of lasting reform. One way to provide
additional credibility would be to make it more difficult for the legislature
to increase taxes, say by imposing a supermajority requirement. Regulatory
and spending reform also would go a long way toward reinforcing credibility
that New Mexico intends to be a state where people can flourish. Note
that most of the tax reforms assessed below could easily be implemented
with spending restraint ($500 million in lost revenue represents about
five percent of spending). Maybe New Mexico could stop increasing spending
for a year or two, or impose some constitutional restraints on spending
growth.
Now for some thoughts about the following study: the alternative reforms
of interest to people around the state were given to Beacon Hill so that
policy makers would have a sense of some major tax reform options. We
are not locked into any of the particular reforms assessed. In fact, Beacon
Hill has provided us with a spreadsheet that will allow Rio Grande Foundation
to assess any reform suggested in similar fashion.
The Beacon Hill Model was unable to tease out the separate dynamic effects
of removing the gross receipts tax on services, since New Mexico has had
the broader based tax over the period of study. The estimate is derived
by treating removal of services from the tax base as a proportionate reduction
in the tax rate. By removing the tax on services, however, the cascading
effect of business-to-business taxes would also be removed. The dynamic
revenue increase of removing the tax on services would therefore be much
higher than indicated, and the economic benefits would be greater than
indicated.
The reader may wonder why one alternative "reform" looks at
halving extractive taxes, since there is no major push politically for
such a reduction. The first reason we do so is for completeness. Extractive
taxes constitute almost 10 percent of revenue for New Mexico on average.
The second, and more important, reason is that extractive taxes cause
harm to New Mexico's economy just as do other taxes. Extractive taxes
are not a free lunch for New Mexico. And they are not all exported to
other states as was demonstrated in my tax exporting study of natural
gas in 1996 (copy may be found on our web site www.riograndefoundation.org).
The purpose of the Rio Grande Foundation is to suggest scholarly ideas
to improve the economy and quality of life in New Mexico. We are pleased
to offer this report and tax model, New Mexico STAMP, for consideration
of those who share our goals.
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