Richardson Vetoes Food Tax: Sen. John Arthur Smith on How Solvent Is State Government?

"With this latest veto, right now, state finances are being held together by a wish and a prayer....If the state economy doesn't grow as quickly as the governor projected, he won't have the tools to rectify the shortfall...(and) the next governor will have to make some serious cuts." Sen. Finance Chair John Arthur Smith

Governor Richardson yesterday vetoed the $68 million dollars the legislature hoped to raise to meet a growing revenue shortfall when it reinstated the gross receipts taxes on food last month. To evaluate the impact of this veto on the overall fiscal picture I called Sen. John Arthur Smith this morning and had a lengthy chat. Major points:

1. As of now revenues for the next year are projected to come in at $4.8 billion. The budget passed last month is $5.6 billion. To pay for the $800 million shortfall (which must be balanced, no deficit allowed), the state is relying on about $500 million in stimulus funds from the federal government and $300 million from a growth in tax revenues based on a 6% growth in the economy during FY 2011. It is this optimistic 6% growth projection that has Smith worried. If economic growth in New Mexico is only 3% (far more realistic, given the poor performance of the economy nationwide) this will create a shortfall of $150 million.

2. The governor's veto of the food tax will produce a revenue drop of only $50 million, not $68, because of other actions the governor has taken: $13 million from the new cigarette tax will now go directly to the General Fund, earmarked for early childhood, and the governor generated another $5 million in revenue in a separate veto.

Bottom Line: if the state grows only 3% next year there will be a $200 million shortfall ($150+$50).

Other Points:

3. The Film Credit Scandal: How it Hurts New Mexicans. Corporate Income Taxes are not generating expected revenues in part because of the cost of the governor's film credit, which is paid for by corporate tax revenues. Corporate income taxes for FY 2010 were estimated at $160 million. As of a month ago, only $12 million in revenues have come in. The governor's film credit, which pays one quarter of all expenses Hollywood producers incur in filming in New Mexico, will cost taxpayers $92 million this year, up $10 million from last year. These costs have been skyrocketing, as Hollywood producers realize they have a blank check in New Mexico at taxpayer expense. In the last two years alone taxpayers have forked out $174 million to Hollywood, with an economic development rate of return to taxpayers estimated at 14.4 cents on the dollar, for a net loss of $149 million. While corporate tax revenues are expected to improve in the last five months of the fiscal year, the best current estimate is that instead of generating $160 million, they will generate only $100 million, leaving the state budget with a shortfall of $60 million, which will have to be plugged up somehow.

4. Rainy Day Money: To plug up possible shortfalls, the legislature left the state with $132 million in reserves, between 3% and 4% of the budget--normally they like to leave about 10%. In addition, after the legislature (without authorization to do so) appropriated $25 million of the governor's discretionary stimulus money on education (the governor did not veto this tricky movida), the governor is left with only $20 million in federal stimulus money that he can use at his discretion. If a $60 million shortfall develops in corporate taxes, the governor will have to use almost half of his reserves just to plug up this year's budget. If the economy grows at only 3% instead of 6% during the second half of FY 2011, with the $50 million loss of revenue from the food tax, the shortfall will be $200 million, far above the level of reserves we have today. At that point only severe cuts in state spending will be able to cover the shortfall. But of course, by that time Uncle Bill will be on his way to his next job (maybe, according to published reports, in Hollywood?), leaving the shortfalls to the next governor.

5. Other Outrages: Aside from the Governor's Hollywood Giveaway funds (GHG), there are other things that need fixing. Legislators were outraged to learn that the Department of Health, which was exempted from the hiring freeze in state government, has just gone out and hired 536 employees! So much for exercising prudent judgment in a fiscal crisis. And of course nothing has been done about the unauthorized exempt positions, with high salaries nobody can quite justify, nor the conversion of some exempt positions to regular positions in state government that do not automatically expire at the end of a gubernatorial term in office. If the governor were serious about solving the fiscal crisis he would cut at least some of the fat he has accumulated in staff positions. As former UNM professor Allen Reed said in an op-ed piece yesterday in the ABQ Journal (click here) there is virtually no agency that could not trim off 10% without serious cuts in service, after the huge splurge in state spending over the past few years