New Mexico is enjoying enormous revenue from an oil boom. But financial experts are warning lawmakers to prepare for the ‘last bust.’

Pump jacks operate north of Carlsbad in this 2019 photo. (Eddie Moore/Albuquerque Journal)

Copyright © 2022 Albuquerque Journal

SANTA FE – Consultants with a national finance firm say that the once-in-a-generation oil boom now producing a budget windfall for New Mexico should be harnessed to restructure the state’s complex tax system and prepare for an eventual decline in oil production.

In a presentation to legislators Monday, members of PFM Group Consulting warned that New Mexico’s over-reliance on one industry for government revenue creates long-term risk to the state budget, especially if government spending grows alongside a source of income that may dry up eventually.

They recommended a menu of potential changes to the tax code, efforts to diversify the economy and investments in communities that have missed out on economic growth.

More broadly, the PFM consultants encouraged lawmakers to think long term, and recognize the possibility of reaching peak oil and gas production within a decade without a replacement revenue source.

Eventually, a downturn “may be the last bust. The roller coaster may not start over again,” said Ryan McNeely, director at PFM Group Consulting.

But the long-term uncertainty, he said, isn’t necessarily “about doom and gloom. … It’s a time for prudence and a time to reinvest these resource in a way that will pay off in the long run.”

The presentation comes as New Mexico lawmakers prepare for a 60-day session amid the surge in revenue. About $12 billion in general fund revenue is projected in the next fiscal year, a 24% increase over a three-year period.

Altogether, the most recent projection by economists working for the executive and legislative branches of government suggests the state will have nearly $3.6 billion in “new” money available for the budget year that starts in July – a figure that represents the difference between forecasted revenue and current spending levels

But the PFM consultants urged caution about spending the money in a way that might not be sustainable.

The state has a “slow growth and high poverty economy,” according to their presentation, with low participation in the labor force, a decline in population last year and a three-year poverty rate that exceeds every state but Louisiana and Mississippi.

Their recommendations include:

• Broadening the base of activities subject to New Mexico’s gross receipts tax by eliminating some of the hundreds of tax breaks that poke holes in the system and add to its complexity.

• Establishing a more progressive personal income tax structure, reinstituting an estate tax with a break for lower-income families and raising fuel taxes, among other steps.

• Focusing some economic development spending on places or communities with high poverty and high unemployment. PFM also praised some existing economic development efforts, such as innovation districts.

Republican lawmakers objected to the suggestion of increasing some tax rates, arguing it’s a “hard sell” to defend increases while the state enjoys an ocean of new revenue.

But the time is ripe, they said, for reshaping quirks in the gross receipts tax system that hit small businesses and make it more difficult for entrepreneurs.

“We have a once-in-a-lifetime opportunity to do some very important tax reform. … We better strike while the iron is hot,” Rep. James Strickler, R-Farmington, said.

Rep. Jason Harper, R-Rio Rancho, and Rep. Christine Chandler, D-Los Alamos, talk during a break of the Revenue Stabilization and Tax Policy Committee at the Roundhouse, Monday December 19, 2022. (Eddie Moore/Albuquerque Journal)

House Minority Whip Jason Harper, R-Rio Rancho, said lawmakers can help safeguard the state’s fiscal future by slowing down the increases in state spending.

“Eventually, we’ll run out of this resource,” he said. But “the way the system is set up, elected officials often cannot see past the next election.”

Democratic Rep. Javier Martínez of Albuquerque – the nominee to serve as House speaker next session – said lawmakers face difficult choices on adjusting the tax code and might need to spread the pain around.

The oil boom “is an opportunity for us to make the investment now,” he said, “so, when we do see these decreases in state revenue, we are better positioned.”

Democratic Rep. Christine Chandler of Los Alamos – chairwoman of the Revenue Stabilization and Tax Policy Committee, which heard Monday’s presentation – said the Legislature will face difficult choices if it pushes to expand the tax base.

Many of the hundreds of tax credits and deductions that riddle the gross receipts tax system, she said, aren’t used much and won’t generate much extra revenue if eliminated.

And tax changes that cut revenue, she said, would worsen the state’s reliance on the oil and gas industry. “We need to be very cautious,” Chandler said.

The PFM Group, based in Philadelphia, analyzed New Mexico’s tax structure for legislators in a 2020 report. Monday’s presentation was a preview of a forthcoming study examining how changes in the oil and gas sector may shape the state’s tax revenue over the next 15 years.