New Mexico too reliant on fossil fuel revenue, analysts say

Dec. 19—Record oil production has pushed state tax revenue to an all-time high, but analysts warned New Mexico lawmakers Monday the state has become too dependent on fossil fuel money and could face severe shortfalls in the next market downturn.

National financial consulting firm PFM told the legislative Revenue Stabilization and Tax Policy Committee the industry's exceptional windfalls were due to a market anomaly brought on by a spike in energy demand after the coronavirus pandemic's slowdown, combined with the war in Ukraine causing a foreign supply shortage.

This boom is bound to fade, with market fluctuations and changes in energy policies, and could lead to as much as $36 billion less in fossil fuel revenue in the next 15 years than the state's yearly forecasts suggest, PFM Director Ryan McNeely said during a PowerPoint presentation.

Any immediate dip also would be felt because the state doesn't have alternative revenue sources to fill the gap, said McNeely, who recommended the state use its current abundance to revamp the tax system and diversify New Mexico's economy.

"Bottom line: If the oil and gas sector declines in the near term, it's going to create a significant revenue shortfall for the state," McNeely said.

New Mexico oil production increased to a high of 531.4 million barrels in fiscal year 2022 — a 30 percent increase from 2021 — with an average barrel price of $88.11, according to recent report from the Legislative Finance Committee.

That has helped drive the state's projected revenue for fiscal year 2024 to about $12 billion, an almost 43 percent jump from the current $8.5 billion budget, the finance committee's report said.

The fossil fuel industry has been credited with generating a third of the state government's general fund revenue, including for education. This illustrates how the state has become too reliant on a single revenue stream that is vulnerable to a volatile market, McNeely said.

During the oil market bust six years ago, state leaders had to scramble to fill budget holes, he said, adding another downturn is inevitable, whether it's from a gradual market decline after a final peak — which could happen by 2030 — or from a sudden disruption like a pandemic or a war.

PFM isn't the first to raise concerns about New Mexico being too tied to a commodity with boom-and-bust cycles.

Last year, 16 education, community and conservation groups asked the governor and state lawmakers to establish new revenue streams for schools so New Mexico isn't overly dependent on oil and gas dollars as the industry faces a sweeping energy transition to counter climate change.

The Governor's Office has touted the state's efforts to diversify the economy, such as bolstering sectors like renewable energy, aerospace, manufacturing, the film industry, agriculture, cybersecurity, biosciences and even the cannabis industry.

Despite those efforts, the oil and gas industry remains a mainstay for tax money.

McNeely said future shortfalls could be worsened if the state's long-term plans for recurring spending are based on current oil-and-gas profits.

Rep. Javier Martinez, D-Albuquerque, agreed.

"We are in a moment, as we know — historic surpluses — and it would be very easy to ... enact huge tax cuts across the board or grow government to unsustainable levels," Martinez said, calling the presentation a "useful blueprint."

McNeely said non-fossil fuel gross receipts taxes and personal income taxes would have to increase dramatically to offset a severe drop in oil and gas revenue. This is not feasible in a state with the third worst poverty rate in the country, marginal population growth and a ranking of 13th in the nation for the fewest residents with college degrees, he added.

Tax policy changes that PFN recommends:

* Reforming the personal income tax structure and eliminating the capital gains deduction from these income taxes.

* Reinstituting an estate tax.

* Increasing the gasoline tax rate.

* Broadening the gross receipts tax base.

* Continuing to expand excise taxes.

Martinez said one of the "elephants in the room" when talking about broadening the gross receipts tax base is whether to impose a tax on store-bought food.

He commended PFM for offering recommendations.

McNeely said the purpose of the report is not to wallow in doom and gloom but to encourage officials to use the once-in-a-lifetime opportunity to diversify the state's tax system.

Rep. Christine Chandler, D-Los Alamos, the committee chairwoman, said it will be important for the state find other revenue sources to supplement oil and gas, otherwise New Mexico will find itself in "a world of hurt."

Realistically, the state will never get enough money from any single revenue source, such as an estate tax, to cover a substantial loss in fossil fuel money, she said. "It's a collection of activities and ideas and policies that we have to put together to help us wean off the huge dependency that we have."