By Paul J. Gessing
Recently the Legislative Finance Committee produced a report in which (to summarize the findings) they made the case that New Mexico "spends" over half-a-billion-dollars on tax breaks that generate little economic return for New Mexico. The report had many important findings that should certainly influence the way our Legislature and next governor look at economic development, but there are also some issues with the report that need to be addressed and even corrected.
The problems start with its opening line "In FY25, New Mexico spent $520 million on 24 economic development tax expenditures."
Simply put, most tax incentives are NOT spending. Rather they are reductions or the elimination of taxes that might otherwise be collected but aren't. Things like the high wage jobs tax credit and jet fuel deduction, both of which are mentioned in the report, may or may not be good policy, but they aren't spending.
Film subsidies and LEDA (Local Economic Development Act), on the other hand, ARE spending. Why are these to be treated differently? Simply put, exempting a specific business activity from taxation (say a gross receipts tax credit) leaves numerous other taxes to be paid (income, property, etc.). Funds are not required from the state treasury, and the business still generates revenue for state and local government.
In the case of New Mexico's film subsidy which pays Hollywood up to 40% of the cost of filming here, those are payments from New Mexico's treasury to private businesses. Other businesses and people must generate enough money for the state to then hand it over to the film company.
The LFC has criticized (rightly) film subsidies for their poor rate of return. As a starting point both the Legislature and the LFC should distinguish between tax credits or exemptions and outright spending (and work to eliminate the latter).
What about those tax credits? It's not that Rio Grande Foundation is a cheerleader for them. We agree with the LFC in general insofar as they are economically inefficient and a generally poor way for New Mexico to attract businesses and boost economic growth.
Rather than narrowly targeted incentives, the Legislature and next Gov. should focus on broad-based tax reforms like transforming the GRT into more of a sales tax. The Legislature should also consider phasing out the state's personal and corporate income taxes over time. Those steps alone would lead New Mexico to far greater growth than the state has seen.
Another point of contention in the LFC report that needs to be clarified is the seeming assertion that tax incentives should "pay for themselves" or not reduce government revenue. That is simply not realistic. Nearly all tax cuts or credits result in a short-term reduction in government tax revenues.
But New Mexico remains awash in revenue from the oil and gas industry. Policymakers have greatly increased general fund spending by 75% during Lujan Grisham's time in office. They have also poured money into the State's permanent funds, which are now valued at more than $70 billion.
Broad based tax reform along with a few narrowly targeted tax credits can help New Mexico diversify and grow New Mexico's economy. They can also diversify it away from overdependence on oil and gas.
These pro-growth tax policies, hopefully in concert with other economic reforms, will make New Mexico a more attractive destination for people and businesses. This will lead to economic growth and will help us keep more of our human capital at home rather than seeing it flee to other states as has happened for many years.
The LFC does a lot of great work. We understand the political difficulty of advocating for broad-based free market reforms when their budget relies on appropriations from a very "progressive" legislature. The Rio Grande Foundation does not face that problem and can highlight both the LFC's work and shortcomings in their approach to better economic development policy.
Paul Gessing is president of the Rio Grande Foundation, an Albuquerque-based think tank focused on the importance of individual freedom, limited government and economic opportunity.
For reference, this is the report in full:
