Commentary

Cutting Taxes in New Mexico and Elsewhere

New Mexico Governor Bill Richardson is about to kickoff an advertising campaign to promote a new set of tax reductions he recently signed into law. Indeed, the $36 billion tax cut, which cuts the top marginal income tax rate and reduces capital gains taxes, will be a boon to New Mexico taxpayers. Thus far, much of the media attention has centered on how a former Clinton cabinet member could become such an ardent proponent of tax cuts. A more important lesson that is being overlooked is how fiscal restraint and tax competition can make tax cuts possible, even when Democrats are in power.

Indeed, the quest for a substantial tax cut in New Mexico actually began during Gov. Gary Johnson’s last term. During his eight years as governor, Johnson succeeded in reducing state taxes on income, gasoline and capital gains. Johnson sought additional tax reductions during his last year in office. However, he was unsuccessful largely because of his previous clashes with the Democrats in the state legislature. For instance, during his first term, Gov. Johnson vetoed over 200 bills, many of which he described as profligate. The feuding continued into his second term, and by the time he left office Johnson had vetoed over 750 scripts of legislation.

However, Gov. Johnson’s fiscal prudence paid off. He ranked among the seven top governors in each of the Cato Institute’s fiscal report cards between 1996 to 2002. That low rate of budgetary growth has allowed New Mexico to avoid the steep fiscal shortfalls that other states currently face. As a result, New Mexico was able to cut taxes with fewer spending reductions. This made them politically easier for Gov. Richardson to enact.

It should also be noted that these tax cuts were likely prompted by the tax competition that New Mexico is facing from neighboring states. Indeed, New Mexico’s sales and income taxes are higher than many of its economic competitors, including Arizona and Colorado. Furthermore, during the 1990s voters in both Colorado and Arizona ensured that their taxes would stay low by putting effective fiscal discipline measures in place

For instance, Colorado voters enacted America’s most effective tax limitation when they passed the Taxpayer Bill of Rights (TABOR) in 1992. TABOR sets a low limit for expenditure growth and mandates that all surplus revenues be refunded to taxpayers. As a result, Colorado taxpayers received tax rebates every year from 1997 to 2002, totaling over $3.2 billion. No other state has reduced taxes this much during this time-span.

Similarly, in 1992 Arizona voters approved a supermajority tax limit which requires that tax increases had to receive two-thirds support in both chambers of the legislature to take effect. This has been effective at keeping taxes low during the recent fiscal crisis. During each of past two fiscal years Arizona has faced a budgetary shortfall. However, instead of raising taxes to balance the budget, the governor has called special sessions of the legislature to focus on spending reductions. In fact, over the past two years the legislatures have enacted $1.5 billion in spending cuts without one tax increase.

Overall, it is both surprising and heartening to see a former member of the Clinton administration extolling the virtues of tax reductions. However, fiscal conservatives should not wait for other governors to make similar conversions. Indeed, the lesson for advocates of limited government is that fiscal constraint coupled with tax competition can turn even Democrats into supply-siders.

Hopefully, these tax reductions will make New Mexico even more competitive than its low tax neighbors and result in a new round of state level tax cuts in 2004.

Michael J. New, a post-doctoral fellow at the Harvard-MIT data center is an adjunct scholar at the Cato Institute.