New Mexico study on the economic benefits of tax reductions

State taxes exert important effects on state economic activity. Researchers from the Rio Grande Foundation of New Mexico studied the effects of flattening the state income tax, reducing the gross receipts tax (GRT) from 5 percent to 3 percent, removing the GRT from services, cutting mineral taxes in half and phasing out the personal income tax.

They found these changes would have major economic impacts on New Mexico.

Flattening and simplifying the structure of New Mexico state income taxes would increase employment by more than 8,500, or 1.1 percent, rising to more than 35,000 by 2005 – boosting payrolls in the state by $248 million in 2002, and by more than $1 billion by 2005.

Cutting the GRT and excise taxes by two-fifths, from 5 percent to 3 percent, would cause employment to rise by over 23,000 (2.9 percent) in 2002, and by four times this amount in 2005.

Eliminating the GRT would reduce the tax base by 31.6 percent; but in the first year more than 18,000 new jobs would be created, rising to almost 76,000 new jobs by 2005, for a 17.2 percent increase in employment.

If taxes on oil, natural gas, and other minerals were halved, 4,000 more jobs would be created in 2002, and more than 15,000 by 2005.

Finally, if the personal income tax were phased out beginning with a 30 percent immediate reduction in the tax, employment would increase by more than 13,000 (1.7 percent) and tax collections would be reduce by $263 million (-6.5 percent), but employment would increase by more than 10 percent by 2005. Tax revenue would drop in 2002, but would actually rise slightly in subsequent years.

Source: Measuring the Effects of Tax Changes in New Mexico: The New Mexico State Tax Analysis Modelling Programme, November 2001, Rio Grande Foundation.

For more information: http://www.riograndefoundation.org/
For more on Taxes & Economic Growth http://www.ncpa.org/iss/tax

FMF Policy Bulletin\6 May 2002