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Purchasing Preference Laws: Who Wins and Who Loses?

by Matt Mitchell on December 29, 2010

in Tax and Budget

Like many states, New Mexico has what is known as a “government purchasing preference law.” This is a statute that requires the state to give preference to local businesses when it purchases products and services on the market.

Many businesses in New Mexico object to the law because they feel it isn’t as strong as the laws of other states. Writing in the Albuquerque Journal (I can’t seem to find a link) business leaders Sherman McCorkle and Dale Dekker argue:

The current law has not achieved its intended purpose. Out-of-state companies are   able to easily qualify as “resident businesses” and reap the rewards of this status.

Nevertheless, local businesses are penalized when they attempt to do business in other states with more stringent residency requirements. According to McCorkle and Dekker:

Basically local companies are hit by a double whammy — they aren’t able to truly benefit from the New Mexico preference law yet they’re penalized in other states because New Mexico has a preference law.

In an attempt to “level the playing field” the state’s business and organized labor communities have met with State Senator Tim Keller to draft an updated government purchasing preference law that is modeled after other states’ laws.

According to McCorkle and Dekker, “When public money is spent in-state all New Mexicans benefit.”

Really? All New Mexicans? Of course, New Mexico businesses benefit from a leg-up against the competition. (At least in the short run; one could argue that over the long-run businesses that are sheltered from the rigors of competition eventually stagnate).

But what about the customers? Do New Mexico taxpayers really benefit when they have to pay extra for government services?

The data suggest otherwise. In an article in the journal Public Choice, economists Steven Craig and Joel Sailors studied the impact of purchasing preference laws on state expenditures. They found that states with such laws spend about 3 percent more per capita. Moreover, they found that the tax base does not rise enough to pay for the extra spending and that revenue must be raised as well. 

As far as economic theory is concerned, purchasing preference laws make little sense. The aggregate costs to taxpayers/consumers outweigh the aggregate benefits to local businesses. And when other states have similar laws, local monopolies dominate everywhere. In addition, there tend to be higher production costs when firms are sheltered from competition as well as rent-seeking costs when firms sink resources into lobbying for such protection. This was bad economics during the mercantilist era and it is bad economics today.

A real step toward reform would be a strong interstate agreement against all purchasing preference laws.

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