State Budgets

New Mexico State of the State: Governor Applauds Economic Diversification and Pushes for Comprehensive Tax Reform

Consistently pro-growth reforms are needed to substantively improve the 35th place economic outlook.

New Mexico Governor Susana Martinez commended the economic turnaround following the loss of 10,000 oil and gas jobs as commodities prices plummeted. This sector-specific turmoil followed the Great Recession, prolonging the lethargy longer in New Mexico than almost anywhere else. “In New Mexico, in the midst of these headwinds, we chose the right path. We didn’t lean on the flimsy crutch of the federal government. We set a new course and chose to diversify the economy instead… As a result, we find ourselves in a much different position today than we were just one year ago.” Although she proposed much-needed tax reform, other matters of needed economic policy reform were left mostly unmentioned.

The governor touted cutting tax rates 37 times since taking office and a corporate rate reduction of 26 percent. With a $330 million projected budget surplus for the current fiscal year, she called for “comprehensive tax reform” to reduce “the cost of doing business” in New Mexico. According to Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index, corporate tax rates declined from 7.6 percent in 2013 to just 5.9 percent this year—an improvement from 28th to 15th. Unfortunately, personal income tax progressivity remains 14th worst nationally, negatively impacting small businesses. And residents endure the 2nd highest sales tax burden in the nation. Overall economic outlook remains stuck at 35th.

“Wages are up, per capita income is up, and as people look for work again and find jobs, the unemployment rate is falling,” proclaimed the governor. Despite this good news, the state ranked 6th worst in overall economic performance from 2006-2016. In fact, New Mexico was one of only a handful of states to actually lose jobs throughout that period. Much of this performance stems from the high economic concentration in the energy sector of the economy and the downturn in that sector.

Governor Martinez advised legislators, “We must realize that economic diversification is our state’s path out of poverty… We are building a broader private sector than ever before.” The state has made progress in this regard. Diversification has meant just 40 percent of growth is from oil and gas production in the current recovery. Following past recessions, the energy production sector comprised a proportion double that. She celebrated that “economic growth that is broader and more diversified than it’s been in a decade.”

Much credit was given to multiple forms of favoritism used to attract specific businesses or sectors to the state. Although politicians are able to point to visible results from the favored entities, the rest of New Mexico taxpayers are forced to pay higher taxes to pay for these handouts. In aggregate, the overall business climate may be rendered less hospitable as a result.

Governor Martinez focused on the closing fund that has “helped create thousands of jobs.” This typically consists of grants to new or expanding businesses for land, buildings, or infrastructure. In New Mexico, local governments are permitted under the Local Employment Development Act (LEDA) to pass local option gross receipts taxes to pay for “qualified” projects. In particular, the governor boasted of the $40 million of tax dollars used to stoke the “catalyst fund” for tech companies. She also embraced the preferences for in-state companies for state contracts. Picking winners and losers based on place of domicile is not sound policy.

Fortunately, she encouraged legislators to reject pork-laden infrastructure projects. She desires a focus on “large-scale projects” that “lay a foundation for economic growth.” This includes border infrastructure in pursuit of expanded global trade.

For teachers, she proposed 2 percent raises for all along with a $5,000 bonus for high-performing teachers. She also recognized increased spending alone will not eradicate public education problems. She hopes to cap state education dollars being spent on administrative expenses. In addition, she wants to expand the options available to parents of children attending failing schools. According to the ALEC 22nd Edition Report Card on American Education, New Mexico has an “F” in private school choice programs.

The governor’s proposals for comprehensive tax reform, economic diversification, infrastructure spending prioritization, and education reform can generate longer-term opportunities. However, additional changes are needed. The state’s tort system and worker’s compensation costs remain economic drags. The relative lack of tax and expenditure limits and 8th highest number of state employees per capita contribute to a bloated state government. Over 15 years (2002-2017), state funds spending increased 50 percent, far outpacing the combined population growth (8 percent) plus inflation growth (25 percent). Consistently pro-growth reforms are needed to substantively improve economic outlook.

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