What might have been for New Mexico

Have you ever wondered what New Mexico might be like had its state government not grown so fast? We can get some idea by looking to our neighbor to the north. Colorado has imposed tax and spending limitations by rule since 1992. These limitations are known by the acronym TABOR (Taxpayers’ Bill of Rights). State spending is limited by TABOR to the rate of inflation plus the rate of population growth. In essence TABOR holds real state spending per capita constant.
Suppose New Mexico had implemented a TABOR in 1992. What would now be the size of its general fund budget as constrained by the rates of growth of population and the price level? Population has grown by an annual average of 1.6 percent in the period from July 1992 to July 2003. The price level has grown by an annual average of 2.6 percent from February 1992 (index of 138.6) until February 2004 (index of 186.2) as measured by the consumer price index. A New Mexico TABOR would have limited general fund average annual growth to 4.1 percent (1.6% population growth plus 2.6% inflation).
Since the New Mexico general fund budget was $2,044.9 million in FY 1992, TABOR would have limited it to $3,447.8 million for FY05 (beginning July 1 2004). Contrast that with the actual FY05 budget of $4,380.6 million! TABOR would have saved the taxpayers $932.8 million. That works out to be $491 for every man, woman and child in New Mexico. According to our estimates such a saving would have permitted a gross receipts tax rate reduction of some two and one-half percent! The gross receipts tax we pay would be more in the neighborhood of four and three-quarters percent rather than six and one-quarter percent. Now that would promote economic development!
Some other observations based on the general fund budget over time: The budget has grown at a rate of 6.0 percent annually since 1992 (rather than at a TABOR constrained 4.1 percent). The Medicaid portion of the budget has grown at an annual average rate of 13.3 percent and it increased 16.3 percent for FY05. We predicted the Medicaid budget would be out of control without real reform. Governor Johnson was able to hold general fund spending to an average annual rate increase of 5.0 percent during his eight years in office (nice going, Governor J). He was able to hold Medicaid’s average annual increase to 11.2 percent.

For Eyes of New Mexico

Last week I visited an eye clinic in Albuquerque. As I was completing the paperwork prior to my exam, a young woman entered the office. She was visibly upset because she had been unable to obtain new glasses under her old prescription. She was informed that opticians in New Mexico are prohibited from filling eyeglass prescriptions that are more than one year old. It turns out that her prescription was about 13 months old.
Isn’t it wonderful that we have the all-knowing state to decide her trade-off between the expense of another eye exam, fulfilling her old prescription or going without? The optometrist’s administrative assistant explained to me that some states are much less efficient than New Mexico, allowing as much as two years before mandated expiration of a prescription!
Who do you think benefits from this restriction on free choice in the marketplace? Who loses? If the overall losses are greater than the benefits, how could such a restriction be passed by our legislature?

Lack of Economic Freedom in NM

Economic Freedom Promotes Prosperity
The Rio Grande Foundation’s research and educational activities are based on the principle that:
Increased individual liberty leads to increased prosperity, individually and collectively, so long as voluntary contracts are enforced and well-defined property rights exist.
This principle is derived from a sound empirical foundation and examination of incentives. When societies are ranked by an index of economic freedom over the long run, we find their ranking of prosperity to be in nearly one-to-one correspondence with their degree of economic freedom. The more economic freedom there is, the better-off people are. That fact deserves notice in New Mexico!
The link between freedom and prosperity is not surprising when we compare incentives that guide individual behavior. Behavior is quite different for different degrees of economic freedom. But those differences are usually overlooked by decision makers, so the freedom-prosperity link also is usually overlooked. Lacking a careful examination of incentives, it often seems plausible that increased taxation and/or regulation will achieve a worthy goal (such as improved safety, environment, or transportation; or increased economic development; or helping the poor). On the contrary, economic freedom usually guides people to coordinate their activities in ways that better achieve these worthy goals.
The following graph depicts the empirical relationship between economic freedom and peoples’ well-being for states in the region. As the size of government increases, economic freedom decreases. And the greater is the size of government the less prosperous are the state’s people. New Mexico needs to reduce the size of government and move up the hill toward prosperity.
We should be aiming for G* if we are going to maximize well-being. Unfortunately, however, we are sliding down the slippery slope toward serfdom. For more on the link between economic freedom and prosperity go to Economic Freedom of North America, New Mexico 2000, or Economic Freedom of the World.