CHAPTER 4

Diversifying Our Economy

Chapter Advisors

Many thanks to the advisors for this section: Richard Anklam, New Mexico Tax Research Institute; Elizabeth Davis, NM Economic Development Department; Ceela McElveny and Gary Tonjes, Albuquerque Economic Development.


A diversified economy is one in which employment and revenue streams come from multiple industries. When jobs and revenues are concentrated in just a few types of businesses, a state’s economic stability becomes sensitive to volatile business cycles.

New Mexico ranks seventh worst in the nation for industry diversification, according to the 2014 Hachman Index. Most of our neighboring states rank in the top 25.[1] The index measures industry diversity based on private-sector employment data. New Mexico’s ranking is worse than our neighboring states because most employment is highly concentrated in a small number of industries.[2]

The majority (57 percent) of New Mexico's jobs are concentrated in the healthcare, retail trade, accommodation, food services, education and public administration industries. Education and healthcare not only rank as the largest industry sectors, but these industries are also projected to lead in numeric employment growth.[3] Meanwhile, other government jobs (such as the federal labs), as well as agriculture and manufacturing sectors, are projected to experience a decline in employment.[4]

Revenues are highly concentrated in the oil and gas sector, which is spread out across several of the industry categories in the chart below. In 2013, production taxes, royalties and other direct sources of state revenue from the oil and gas industry accounted for 31.5 percent of New Mexico's General Fund.[5]

Given New Mexico’s reliance on declining federal spending and tax revenues from the fluctuating oil and gas industry, many people believe that the need to create a robust and diverse innovation-based private sector economy is crucial.[6]

“Private sector business needs to take back and drive the economic development initiatives in our state,” said Dale Dekker, who is active in economic development circles in New Mexico. “For too long, businesses have existed because there has been a lot of work in the public sector. But we need to grow the pie; that’s the challenge now. That’s not necessarily getting the next government contract or hoping that oil prices go up. We have to grow by exporting our goods, products and services.” In other words, create economic base jobs.

Growing the Economic Base

Industry diversification has been a priority of every New Mexico governor in recent history, including Susana Martinez. As she noted in her 2015 State of the State address, “Helping businesses grow, attracting companies and jobs from elsewhere, and making New Mexico a high-tech jobs leader – that’s how you create a more diverse economy and a stronger private sector.”

“Helping businesses grow, attracting companies and jobs from elsewhere, and making New Mexico a high-tech jobs leader – that’s how you create a more diverse economy and a stronger private sector.”--Governor Susana Martinez

Key to those goals, many believe, is creating ‘economic base’ jobs. An economic base job is one that exports goods and services, bringing new money into the state, as opposed to circulating existing money within the state. By one estimate, the state must create 140,000 new economic base jobs in the next 10 years – an average of 14,000 per year – just to return to pre-recession employment levels.[7]

Of the 14,000 new jobs annually that must be created, it is estimated that 4,000 would be created organically, without help from any program or policy. The remaining 10,000 per year would have to come from elevating investment and policy support for new and existing program efforts. [8]

The NM Legislative Jobs Council has identified eight sectors where state and local efforts could affect creation of economic base jobs:

  • Private sector employer-based (27 percent)
  • Federal government including healthcare expansion (20 percent);
  • Energy and extraction (11 percent)
  • Visitor/jobs with salaries paid from the local sale of goods and services to visitors from out of state (11 percent)
  • Retirees (11 percent)
  • Freelancers/independent contractors (6 percent)
  • Film and digital media (6 percent)
  • Startups (5 percent)
  • Agriculture (3 percent)

New business recruitment in target industries is an obvious and traditional method of creating more economic base jobs. Economic developers at state and city levels are continuously pursuing new businesses through participation in national trade shows, wooing site selectors, targeted marketing, etc. All of that is costly in terms of money, time and human resources, especially for a state that has so little of each.

Recruiting Retirees and Freelancers

However, due to upcoming changes in workforce composition, New Mexico may have an opportunity to build on an existing population sector. The equivalent of creating tens of thousands of economic base jobs could be achieved by strategic recruitment of retirees and freelancers, both of which are forecast to multiply significantly in the next four years.

As Baby Boomers retire, 31 million jobs are expected to open nationally, and another 24 million new jobs will be available by 2020,[9] but that doesn’t mean the older, jobless population stops spending money. Retirees often receive pensions or other financial benefits from former employers – money that could be brought to New Mexico and spent here if they moved from out of state. Though retirees do not technically generate new economic base jobs, studies show that the economic activity (home purchases, household expenses, Medicare spending) produced by in-migrating retirees equates to creation of jobs.

As for freelancers, about one in three U.S. workers is a freelancer today.[10] That number is expected to increase nationwide to more than 40 percent by 2020.[11] Recruitment of freelancers brings significant potential to increase out-of-state income since freelancers who move to New Mexico would typically have clients elsewhere. Freelancers and startup businesses are anticipated to drive economic base growth in the 21st century nationwide, even though locally, they are likely to generate less than 12 percent of the economic base jobs needed.[12]

A national “perceptions study” commissioned by the Albuquerque Convention & Visitors Bureau (ACVB) in 2014 suggests it may not be difficult to attract either demographic because both young professionals and older workers already tend to have a positive perception of New Mexico’s largest city, Albuquerque.

The two segments with the most positive perceptions of Albuquerque as a place to work and live (and who were open to relocating) were “Young Achievers” (educated, young professionals) and “Got It Togethers” (older professionals who may soon be considering retirement).[13]

Regional Differences

It is important to note that the degree of industry concentration and the type of available employment depends strongly on the geographic area being examined. For example, more populous counties like Bernalillo, Otero, Santa Fe, Dona Ana and Chaves generally rank higher for industry diversity. [14] The least diverse economy is the high-wage government laboratory town of Los Alamos, where almost 75 percent of employment is in the professional services and technical sectors.[15] Eddy and Lea counties have little industry beyond energy and mining. Because of these multiple micro-economies within our state border, some people recommend that we focus on economic diversity county by county.[16]

Goals and Challenges

States that attract new people and new companies do multiple things well.

  • They know how to market their state.
  • They invest in strategic branding.
  • Their economic development agencies hire a broad range of specialists and pay them well.
  • The political, regulatory and tax climates are considered “friendly.”
  • They often provide incentives in the form of cash offered up front and the flexible use of that cash, often after high-level negotiations.

Economic developers and tourism experts recommend that New Mexico invest more in external marketing efforts. They argue that retirees and freelancers elsewhere need to be made aware of the state’s abundance of outdoor recreation, temperate weather, relative low cost of living and quality health care. Companies need to be told not only about those amenities but also about positive aspects of the state’s business climate.

Similar outreach may be warranted with the business world. It does little good, for example, to reduce the state’s corporate income tax by 27 percent or to adopt the single sales factor (both done in 2013) in an effort to compete for business if no one outside of the state knows about those changes.[17]

“New Mexico is an unknown commodity,” said Steve Vierck, former head of the New Mexico Partnership, a statewide economic development nonprofit that serves as the official business recruiting arm for the state. “You have to be on the awareness screen to get compared to other states. A part of our challenge has been to just get noticed.”

Marketing

However, getting noticed costs money. Budgets of economic development entities are tight. The lack of money at state and city levels is causing some economic development leaders to suggest that tourism budgets and economic development budgets might be shared, or that at least the two efforts be marketed under a single brand, in an effort to have the greatest impact with little resources.

In fact, just this year the NM Economic Development Department launched an initiative called ‘New Mexico True Business,’ hoping to capitalize on the Tourism Department’s existing ‘New Mexico True’ brand.[18]

The ACVB perception study described previously suggests there is opportunity to leverage tourism marketing efforts with economic development. It found that the travelers who respond most favorably to Albuquerque as a vacation destination share many characteristics with the professionals most likely to consider the city a good place to build a career — or business — and raise a family. Those similarities scream for collaborative marketing efforts.[19]

Still, others advise that tourism marketing is very different from economic development and that while advertising is impactful in vacation decisions, it has little influence on business decisions.[20] Staffing in New Mexico’s economic development agencies poses a challenge equal to that of marketing. Communities throughout the state may not have the number of people needed to compete with cities of similar sizes in states like Texas, Arizona and Utah. For example, the New Mexico Partnership has three employees, but an equivalent agency elsewhere may have 20 or more.[21]

Population

New Mexico’s population growth is also different from other states. We grew just 1.3 percent from 2010 through 2015, and that growth occurred only because more people were born than died during that period. During that same time, Arizona grew almost seven percent and Texas grew more than nine percent.[22] A low population growth rate, combined with a large percentage of children born into poverty, presents unique economic challenges for our state. In the meantime, New Mexico saw almost 30,000 more people leave the state than move in. One reason for migration is that some economic opportunities are better elsewhere.[23]

Population growth is generally viewed as healthy from an economic development perspective. However, in our desert state, people also understand that growth efforts must be tied to long-term water planning, ensuring we do not deplete natural resources.

New Mexico’s Tax System

Gross Receipts Tax

New Mexico’s Gross Receipts Tax (GRT) is considered by many as being prohibitive to economic prosperity and job creation. It is, however, the single largest contributor to the state’s general fund, the largest contributor to municipal government coffers, and a significant component of county government budgets.

To understand the challenge, it helps to compare New Mexico’s GRT with approaches used in other states. There are three main models:

  • A sales tax, which is a tax on the final product, usually tangible property, sold to consumers.
  • Traditional GRT: A turnover tax, typically imposed at very low rates (i.e., 2 percent or less) on gross income, and typically used to replace corporate income tax as a tax on business activity. It does not replace sales taxes in states that have them.
  • New Mexico’s GRT: An excise tax applied much more broadly to a wider array of products and services that lead to a final product, plus the tax on the final sale.
“Today’s GRT makes poor households poorer, kills jobs and incentivizes out-of-state buying.”--Richard Anklam, NM Tax Research Institute

New Mexico’s taxing of each step in the process is commonly called ‘pyramiding’ since it creates layers of taxes that are often buried in the cost of the final product. These taxes include everything from temporary services to hiring accountants, making the cost of doing business higher in New Mexico than neighboring states. While there are a handful of states that impose traditional GRT, New Mexico’s approach is somewhat unique. It is a hybrid of a sales tax and traditional GRT.[24]

“Pyramiding adds considerably to the already regressive nature of any consumption tax, making the tax much more burdensome to poor households than a traditional sales tax,” said Richard Anklam of the New Mexico Tax Research Institute. “On the business side, the problem is generally worse for smaller businesses than large ones, because small companies don’t have staffs of in-house accountants or IT managers. The small companies rely more on outside contractors, and under GRT, they pay taxes for those services. This increases their cost of doing business in ways that wouldn’t happen elsewhere.”

Over the last decade or more, our state’s taxation system may have become less stable because of tax base erosion (e.g. new exemptions/deductions narrowing the consumption base) and a long-term trend to increase GRT rates. The controversial exemptions of food and health services from GRT were intended to make those essentials more affordable. Some argue they have done exactly that. Others say removing those items prompted the state to raise GRT on everything else, penalizing consumers – especially the low-income.[25] “Made much worse with the addition of the rising rates, today’s GRT makes poor households poorer, kills jobs and incentivizes out-of-state buying,” said Anklam.

However, eliminating GRT would create a huge disruption in New Mexico’s funding base. Our state relies heavily on the service economy, so taking it out of the taxation equation would definitely affect our bottom line and impair the state’s ability to provide existing government services. Any reform efforts would be challenging, demand significant research into viable alternatives, and require major bipartisan cooperation.

Menagerie of Tax Incentives

To overcome perceived disincentives to businesses operating in NM, the state offers tax incentives. According to the state Economic Development Department (EDD), incentives generally play the biggest role in attracting new businesses to the state. New Mexico offers more than 300 tax exemptions, deductions and credits against the GRT. Several incentives were also established to help create high-wage, technology and rural jobs, as well as tax credits for companies making manufacturing investments that grow the economy. [26]

Barring major reform to the overall GRT structure, the argument for targeted tax subsidies and incentives is supported by three studies performed by the national economic research firm Ernst and Young. The first one, in 2011, concluded that New Mexico had the worst state and local business tax burden of any state. In 2012 and 2014, the New Mexico Tax Research Institute engaged the firm to repeat the study, but to change the method by factor in existing state tax incentives. The 2012 and 2014 reports compared us with Arizona, California, Colorado, Nevada, Oklahoma, Oregon, Texas and Utah – all western states with which New Mexico is often compared. This research determined that, after incentives were accounted for, New Mexico’s ranking improved greatly for the targeted industries, moving us to the middle or near the top of the rankings for the states modeled.[27]

However, all those incentives and subsidies can create concerns and confusion, which some argue just adds to the state’s economic troubles. That’s according to a report released in January by UNM and the Committee for Economic Development, a national policy organization. The study recommends business leaders push for a rigorous review of tax subsidies to determine whether the incentives are worth the money spent. The study noted that private companies can apply for 34 tax credits in seven industries. Between 2011 and 2013, the state issued 860 subsidies at a cost of more than $262 million.[28]

People on all sides of the issue agree that further research is probably warranted, especially on the long-term value of tax subsidies, their impact on the state’s economy and the role of GRT.

Strategies for Diversification

The potential need to devote more resources to economic development, whether in staffing, marketing, or other contexts, is not lost on the EDD. “Even Wyoming spends a lot more than we do, and they have one-quarter the population,” said EDD staffer Elizabeth Davis.

The state’s five-year (2015-2019) strategic plan outlines priorities that require a significant amount of funding or capital investment. These investments include improvements to technology commercialization, defense industry diversification, as well as increasing and maintaining Local Economic Development Act (LEDA) and Job Training Incentive Program (JTIP) funds.

Technology Commercialization

Among the highest priorities for the EDD is creating tech commercialization pipelines that result in statewide job creation.[29] Here’s what that looks like: When research and technological development in the state’s national labs or universities is successfully converted to products or services in the marketplace, that leads to creation of private-sector businesses around those products, and ultimately to creation of jobs.

To realize greater success in tech commercialization, the EDD reopened in 2014 its Office of Science & Technology (closed since 2011) and integrated efforts withthe Technology Research Collaborative (TRC). The TRC unites New Mexico’s research institutions to accelerate the commercialization of new, homegrown technologies. The barriers to success most often noted by TRC members are a lack of funding for technology maturation and seed capital for start-up businesses.[30]

Patricia Knighten, who manages the state’s science and technology office, recently published the Science and Tech Plan, which among other things calls for $1.5 million in seed capital for technologies born in New Mexico’s labs or universities. It also recommends a higher education endowment fund, a fund for matching federal research grants, and other large standing budgets of money so that more tech commercialization opportunities can be pursued by research institutions.[31]

Show and Tell

To improve outsiders’ perceptions of New Mexico and to familiarize companies with what the state has to offer, the EDD offers annual tours for site selection consultants. The first of these was hosted last year in Santa Fe.[32] Many local organizations host similar tours. For example, Albuquerque Economic Development (AED) hosts about a dozen site selectors every year during the city’s international balloon fiesta.

Other strategies the state either uses or could implement to attract outside companies include:

  • Engagement of local/regional economic developers to “sell” their communities since no one knows their respective markets better than those who live there
  • Sales missions, or one-on-one meetings with site selectors in their home cities
  • Meetings with targeted companies in their respective locations
  • Select advertising and general marketing to economic development publications and through direct mail
  • Trade shows targeted to industries that make sense for New Mexico (i.e. space, aircraft, petroleum)
  • Relationship-building among those individuals nationwide who represent the largest number of site selection projects

Industries Worth Pursuing

While the state is not in a position to be overly selective about business sectors it would like to attract, there are some that tend to make more sense than others in New Mexico. Because of our climate, natural resources, outdoor/cultural amenities and cutting-edge research and technologies generated by three national laboratories and three nationally recognized research universities, New Mexico is, or could become, competitive in the following target areas.[33]

Natural Resources: Water, Energy, Forests

Water security, food security and energy are major issues confronting the world for the foreseeable future. New Mexico could lead the way in resource management, especially as it relates to water and energy. If our state could solve our own water problems through technology, planning and policy initiatives, we could teach others to do the same. Similarly, expansion of renewable energy (wind, solar and geothermal), while retaining conventional (oil and gas), could create more opportunities to lead – and grow the economy.

Expanding efforts in forest and watershed restoration presents another growth option. Doing so would help protect our forests from extreme fire, while also potentially creating rural jobs and reinvigorating New Mexico’s timber industry.

High Tech

Optics and photonics are rapidly growing and specialized fields of physics and engineering based on the science of light. They affect the fields of health, defense, telecommunications, digital photography and others. In New Mexico, the Air Force Research Lab and Sandia National Laboratories created a large private sector contractor capability that is unique to the state.

Similarly, bio-tech, bio-pharmaceuticals and new drugs are growing three times faster than traditional healthcare.[34] UNM and the Bio-Science Center in Albuquerque are indicators of the human capital, research and development (R&D), and intellectual property that exists in our state.

Tourism

New Mexico’s trifecta of history, nature and culture makes us unique in the nation for tourism. In 2014, the state saw 2.3 million visits from people engaging in “quiet recreation,” such as campers and hikers — bringing $173 million to the state that year and employing more than 1,700 people.[35]

Increased tourism could bring immediate benefits for state and regional economies. Marketing outreach could target travelers in the U.S. as well as Mexico’s growing middle class.

Sports tourism could provide another growth opportunity. New Mexico’s weather and elevation make us a great place to recreate, and the state could become a leading destination for regional and national youth sports activities. Strategic investments in facilities and infrastructure would be required.

Spaceport

The global attention and media coverage generated by the initial launch of Richard Branson into sub-orbit may be the one of the most anticipated and watched events of the decade. If New Mexico planned ahead, the launch could provide large-scale opportunities to market the uniqueness of New Mexico to business and consumer audiences.

Back Office and Technical Support

New Mexico already has a strong “back office” sector comprised of customer service, technical support, order taking, claims processing, bilingual customer support, accounts payable and mail processing. These jobs exist in Albuquerque, Las Cruces, Rio Rancho and elsewhere. Strategies to grow this sector include: training/credentialing a bilingual workforce, strong workforce development with education in “soft skills” including phone courtesy, and expansion/maintenance of reliable, high-speed broadband.

Retaining Existing Businesses

Attraction is only part of the puzzle; healthy industry diversification also must include initiatives to retain existing businesses and help them grow.

The ability to build and maintain relationships with local business is critical, according to Albuquerque Economic Development (AED). The organization recommends the following types of activities:[36]

  • Holding regular conversations to determine local business needs and challenges.
  • Developing programs that respond to those needs
  • Connecting business with internal and external experts in areas of need (startups, tax, law, workforce, tech)
  • Conducting industry appreciation events

Options and Intersections

This chapter offers several ideas for further discussion. How high a priority is industry diversification? What actions might the state take, soon, to expand both the types and numbers of jobs in New Mexico? And how might we align existing efforts, minimizing duplication? To what degree do we want to expand recruitment of retirees and freelancers? How can we spread the word nationally about New Mexico’s capacity to house new businesses? What types of businesses should we pursue? How can we grow our economy while also protecting natural resources and attracting industries that might thrive in our desert climate?

These questions are also influenced by other sections in this report. The discussion of federal investments in New Mexico – including the pros and cons of those dollars – bears heavily on the issue of diversification. (Ch. 6) Broadening the economic base is not just a challenge in our urban areas, it is a priority for our rural and tribal communities as well. (Ch. 5) Any new industries will require a highly trained workforce supported by a world-class university system. (Ch. 2)


Chapter Endnotes

Short reference sources below; complete citations in the bibliography.

[1] (Utah Department of Workforce Services 2015)
[2] (NM Department of Workforce Solutions 2014), (NM Labor Market Review 2015)
[3] (New Mexico Department of Workforce Solutions Economic Research and Analysis Bureau 2015)
[4] (New Mexico Department of Workforce Solutions Economic Research and Analysis Bureau 2015)
[5] (NM Energy Minerals and Natural Resources Department 2015)
[6] (New Mexico Economic Development Department 2016)
[7] (New Mexico Legislative Jobs Council December 2015)
[8] (New Mexico Legislative Jobs Council December 2015)
[9] (Georgetown University 2013)
[10] (Weber, The Wall Street Journal 2014)
[11] (Giang, Business Insider 2013)
[12] (New Mexico Legislative Jobs Council December 2015)
[13] (Dyer, Jessica 2015)
[14] (Shaleen, NM Labor Market Review: New Mexico's Industrial Diversity: A State- and County-Level Analysis 2015)
[15] (Metcalf, NM Ranks Low for Diversity in its Economy 2015)
[16] (Quigley 2016)
[17] (Tonjes, President, Albuquerque Economic Development 2016)
[18] (Davis, Research and Marketing Director, New Mexico Economic Development Department 2016)
[19] (Dyer, Jessica 2015)
[20] (Davis, Research and Marketing Director, New Mexico Economic Development Department 2016)
[21] (Tonjes, President, Albuquerque Economic Development 2016)
[22] (Quigley, New Mexico's Population Struggle 2016)
[23] (Quigley, New Mexico's Population Struggle 2016)
[24] (Anklam 2016)
[25] (Quigley, Your Government Needs More Money 2016)
[26] (Davis, Research and Marketing Director, New Mexico Economic Development Department 2016), (Tonjes 2016)
[27] (Ernst and Young 2012, 2014)
[28] (Rocca 2016)
[29] (Davis, Research and Marketing Director, New Mexico Economic Development Department 2016)
[30] (Knighten, Patricia, 2015)
[31] (Knighten 2016)
[32] (Tonjes, President, Albuquerque Economic Development 2016)
[33] (Dekker, 2016), (New Mexico Economic Development Department, 2016)
[34] (Dekker 2016)
[35] (Moss 2016)
[36] (Tonjes, 2016)

 

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