We can’t afford the 2003 income tax cuts

There’s been a lot of talk about the growth in the New Mexico state budget during Governor Richardson’s tenure (including commentary by John Northdurft of the conservative Heartland Institute on this very website), but very little has been offered in the way of facts. There’s also been lots of talk about the best way to recover from a recession, but, again very little fact. Let’s look at a few facts, starting with state budget: While it’s true that the budget has seen growth over the past six years—most news outlets have put the amount at 40 percent—it’s good to remember two important things: One, more than two-thirds of that increased spending (28 percent) was necessary simply to keep up with population growth and inflation. So, in real terms, budget growth was much smaller. Two, this increase came on the tail of eight years of a strangled budget under libertarian Governor Gary Johnson.

Education—which represents the largest single expenditure for the state—saw some of that increased spending. And not a moment too soon. At the end of the Johnson administration, New Mexico ranked 38^th in the nation in K-12 per-pupil spending. That’s 38^th worst, not best. We ranked 42^nd on education-related salaries. By 2006-07, we had moved up to 33^rd in overall per-pupil spending, and 36^th in salaries. We’re still far from where we need to be, but we’re improving.

Richardson made increased education spending one of the cornerstones of his economic development strategy. And well he should. Too often we’ve heard that the companies we’re trying to lure here won’t come until we can provide a better educated workforce. Thomas Lavelle, the VP of Xilinx, told Richardson just that in 2002, when the governor was trying to get the high tech company to expand its operations here.

The Richardson Administration also made important investments in child care assistance, which Johnson had gutted, and introduced a pre-K program. Early care and education (ECE) programs like these are proven to pay off in the long term. Quality ECE programs improve school test scores, raise high school graduation rates, and lower costs associated with crime—all of which are outcomes that can only improve economic development. Still, ECE spending represents less than 2 percent of the state budget.

K-12 education is an easy target for budget cuts because it takes up such a large share of the state’s budget, but that’s because of the way we fund education, not the overall amount we spend on it. In most states, education is funded primarily with local property taxes. New Mexico’s funding system is much more centralized, with the vast majority coming from state personal and corporate income taxes, and the gross receipts taxes we pay on most goods and services. Certainly, an argument can be made that this is a more equitable way to fund schools, and it’s also likely one reason our property taxes are so low (we have some of the lowest property taxes in the nation, despite what you’ve read in the local papers).

Health care, much of which is paid for through Medicaid, takes up the next largest piece of the state’s general fund budget. It also got a large share of the recently increased spending, but not because we were able to serve more people. Health care costs have risen dramatically over the last decade. Spending had to rise too just to retain the same level of services for the same number of kids and seniors. But, like education, Medicaid is an excellent investment. For every dollar the state spends on Medicaid, the Feds chip in four more. So when we spend $1 million on Medicaid, we get $5 million in services. But if the state cuts funding for one health care job, five people lose their jobs. Federal Medicaid dollars also create billions in economic activity for New Mexico. This means jobs—particularly in rural areas of the state, which rely more heavily on Medicaid than do urban areas. Cutting Medicaid is ‘penny wise and pound foolish,’ as the old saying goes. You save a bit of money in the short term, but lose a lot more in the long run.

So if we’re not going to make deeper cuts in state spending, it’s pretty clear that we need to raise new revenue. Well, it’s clear to the 37 other states that have already done so. It’s not so clear in New Mexico, even though the source of our revenue woes is. Over the last seven years, the governor ordered up $1 billion it tax cuts. Like the federal income tax cuts of recent years, the bulk of the benefit went to those in the highest income brackets. Although the cuts were (and still are) touted as a source of economic development, they didn’t do much in the way of improving wages for working New Mexicans. What they did do was to concentrate wealth at the top and contribute to New Mexico’s ranking as having the sixth largest income gap in the nation between rich and poor. Flat wages and income inequality hardly add up to a recipe for broad-based economic success. As for job growth—the bulk of that was in the construction industry, thanks to the now-collapsed housing bubble, and ambitious capital outlay spending.

The fact is, the 2003 income tax cuts ended up costing the state significantly more than expected. They also created a structural deficit within the budget by shifting too much reliance onto revenue from oil and natural gas extraction, the prices for which fluctuate wildly.

So now to the argument of what’s the best course for recovering from a recession. The best way to recover from a recession is to do what both the Bush and Obama Administrations did: increase direct spending. Every dollar that the government spends returns on average $1.58 in economic growth. (That’s a better return, by the way, than you get with tax cuts.) Spending creates jobs, which, in turn, create spending. Budget cuts remove money from the economy, and that’s no way to create spending. Tax increases to specific groups—the very wealthy or profitable corporations, for example—are the least damaging way to respond to a recession. While it may decrease spending some, tax increases to the wealthiest households are more likely to involve money that was parked in savings instead of circulating in the local economy.

When the state was flush with money, we gave big tax breaks to the wealthiest New Mexicans. Now that money is tight, we’re making kids and working families pay by way of deep budget cuts. Instead, we need to admit that we just can’t afford those tax cuts and roll them back. New Mexico’s budget problem will not go away for several more years, but cutting spending is only a short-term solution.  The sooner we raise revenue, the sooner we’ll come out of the recession and get New Mexico moving forward again.

Bill Jordan is the policy director for New Mexico Voices for Children.