Thomas Molitor
When government revenues drop during economic downturns such as today’s, a state or a municipality has only three choices to balance the budget.
Unfortunately, one of those choices isn’t to print money. New Mexico doesn’t have a printing press like the federal government does – a printing press manned by a Bernanke and a Geithner, working late into the night printing money to fill the “output gap” of the economy.
A state like New Mexico, or a municipality like Albuquerque, is left with three arrows in its quiver to balance the budget: Reduce spending, raise taxes or borrow (issue debt).
Take Mayor R.J. Berry’s proposed budget for Fiscal Year 2011 for the city of Albuquerque, for instance. I think it shoots the right arrows to achieve a balanced budget. The mayor’s budget reduces the size and structural cost of government, permanently eliminating 160 vacant positions. This prevents a position from laying dormant, ready to be filled as a future political favor.
The budget does not raise taxes and minimizes cuts in services. It proposes salary reductions across the board, with a higher-percentage reduction on employees with higher salaries. It asks police and firefighters to forgo a pay increase later this year that was promised to them by the former mayor, which would still leave them with higher pay than last year.
This makes bottom-line sense for a city or a state charged by charter with balancing the budget.
Reforming the tax system
One way for a state to create a more business-friendly climate and create jobs is to look for ways to reform its tax system. I believe that New Mexico must reform its tax system to give our state a strong foundation for economic growth.
According to the Tax Foundation’s annual State Business Tax Climate Index, New Mexico’s corporate tax rate ranks 32nd, meaning there are 31 states with lower corporate tax rates than us.
High corporate taxes put New Mexico at a lesser competitive advantage in new-business creation, keeping existing businesses, or attracting out-of-state businesses looking to relocate. After all, economic growth in the states with the highest tax burdens consistently lags economic growth in the states with the lowest tax burdens.
From a national perspective, New Mexico’s corporate tax rate is currently at a competitive disadvantage.
If New Mexico moves toward lowering its corporate tax rate, say at a rate that moves it from 32nd to the top 20 of state rankings, entrepreneurs will decide to incorporate in the now-more-competitive state of New Mexico, rather than in Arizona or Texas or Colorado.
At the moment, corporations have a greater incentive to locate in Nevada, where there is no corporate income tax, or in Texas and Colorado, where the tax bite is smaller, than in New Mexico, where nearly $8 of every $100 in profit is paid to the government.
Much more work to be done
In summary, New Mexico had embarked on successful tax-cutting efforts before this economy crashed; however, much more work needs to be done to position New Mexico to be a beneficiary when this train-wreck economy turns around.
New Mexico’s tax policy matters because the state must compete with other states for tomorrow’s growth industries. Economists in general acknowledge that reduced tax rates have long-run beneficial effects because of their improved economic incentives.
I, for one, am ready to enroll in tax-reform school and enact legislation that makes this state’s economy more competitive and creates new industries and new jobs for New Mexicans. Even if I have to work weekends.
Molitor is a Republican candidate for the state House of Representatives, District 23.