Michael Swickard
“The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.” – John Foster Dulles
New Mexico state government is seething with plots and counter-plots about its $600 million budget shortfall. There are three ways to deal with this shortfall, but only two are being considered: Slash spending from existing state government expenditures, or increase state taxes on citizens and businesses.
Both are very difficult to do. Slashing state spending runs into a companion notion to NIMBY — Not In My BackYard: the political notion NFC — No Firing Cousins. That makes real cuts almost impossible.
Tax increases are problematic since taxes by their nature are dynamic. Supply-side economics notes that tax increases can actually decrease the tax revenues collected by changing the behavior of companies or individuals. Supply-side gets caught in political debates, but the 1999 Nobel Economic Sciences Prize was given to supply-side economist Robert Mundell.
So, it appears unlikely the Legislature can effectively cut state spending enough, and it is unwise to raise taxes. What to do? First we must review the above Dulles quote and ask, will New Mexico have this same problem next year?
We will unless the Legislature fixes the causes this next session. They can only do so by understanding the problem is that the New Mexico business community is not productive enough to support the Legislature’s vastly increased recent spending.
Constrained by taxes and regulations
Getting out of these financial constraints in the budget requires New Mexico’s engine of prosperity in the business sector to function much better and provide considerably more revenue from direct taxes and the taxes levied on workers. That engine is manufacturing and production that ships products out of state. Both industries are quite constrained by taxes and regulations.
New Mexico cannot improve statewide prosperity when citizens just trade with each other in the service industries. While tourism does bring some dollars into the state, we cannot use that industry as our only source of out-of-state dollars.
State government cannot foster prosperity by taking one citizen’s tax money to give to another. In fact, state government spending damages prosperity by removing marketplace capital. The marketplace can survive some taxes, but there are increasing dangers with too much tax.
To increase the state’s overall prosperity, the money must come from outside of the state. What influences how much money and how many jobs come into the state? Taxes and regulations.
Supply-side economics says simply if taxes were either 100 percent or 0 percent, the state would collect no money. However, there is a tax rate that maximizes revenue, and it is lower than most governments believe. Combining the engine of prosperity with better economic conditions — including lower taxes and relaxed regulation — will fill the budget gap and even more.
The permanent cure is to increase the state’s wealth and restrain the growth of state spending. New Mexico’s budget went from $4 Billion to $6 Billion in just a couple of years, which is unsustainable growth.
Bringing together the best minds
Instead of slashing jobs and increasing taxes, Governor Richardson and the Legislature should task the best minds at our New Mexico universities, Sandia and Los Alamos National Labs and companies like Intel to provide leadership on increasing manufacturing and production in a responsible manner. We can smart our way out of unsustainable state government spending.
While I will not be one of the “smart ones” consulted on this, I still know where the “Committee to increase responsible manufacturing and production” will start. They must look at the situation from the eyes of the manufacturing and production companies, since those companies live in a world of incentives and disincentives.
With the correct incentives, New Mexico can see an explosion of new money into the state. Likewise, with the wrong approaches most of the manufacturing, money will leave the state.
This is not rocket science; it is right out of Economics 101. If state government wants more of something to happen in New Mexico, it must make that activity easier to do, whereas if it wants less of something, it must make it harder to do.
The two harder or easier ways are with taxes and regulations. Increasing taxes makes selling a product harder since the price of the product must contain the tax. The rules and regulations governing producing something can make that production easier or harder.
The devil is in the details. It will take all of the wisdom in the state to negotiate those details because some of them are intertwined in New Mexico politics.
The problem is that political stupidity and short-sightedness got us into these financial problems, and the same people must sign off on solutions. When the best minds show how to increase manufacturing and production, we must resolve to not letting politics wreck the solutions. Letting the engine of prosperity be the cure may be all that is standing between having to slash state jobs and raise taxes.
The New Mexico leaders can get out their sharp knives and hack each other up about budget cuts and taxes, or they can strive to get new dollars instead. Joseph Kennedy said, “When the going gets tough, the tough get going.”
Maybe it would be better if when the budget gets tough we smart our way out of this problem so we do not have the exact same problem next year.
Swickard is a weekly columnist for this site. You can reach him at michael@swickard.com.
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