Don't Let The Oil Boom Fool You...New Mexico Has Economic Work To Do
Commentary: For as long as anyone can remember, New Mexico has sought a stable and dependable source of revenue that is not oil and gas. And for as long as anyone can remember, no such alternative has been found. Indeed, the adoption of fracking has resulted in greater dependence on oil and gas than ever before. For FY19, it is expected that fully 40% of state revenues will come from the energy patch.
Now comes news from Santa Fe that revenues are expected to exceed prior forecasts by more than $333 million. We are rolling in the doe. The boom this time is different. Prior to 2008, Permian oil production was in secular decline, but with the advent of new technology, we have seen a surge, with both more production per well and more wells.
But oil production is still subject to the supply and demand, and oil prices can fluctuations by as much as 50% year by year. When a national recession comes, prices will fall. Revenues could fall by 20% or more as they did in FY09 and FY10. That would be a swing of as much as half a billion dollars.
Revenues for this year are expected to be $7.9 billion, which is good news and welcome relief from the stagnant budget numbers of the last decade. But even a budget of $7.9 billion is not a panacea. Adjusting for inflation, state revenues are about the same as the previous peak in FY08.
That is eleven years with very little growth. Meanwhile, state population has increased, and the expansion of Medicare has sopped up resources that otherwise would have gone to other programs. Despite the huge oil boom, at best New Mexico can be said to be treading water.
New Mexico is unlikely to outgrow its dependence on oil. In fact, the oil patch is growing faster than the rest of the state, meaning despite decades of efforts to diversify we find ourselves ever more dependent on the energy patch.
In 2018, for example, 54% of all new jobs were in oil rich Eddy and Lea Counties. This employment growth has been matched by tax revenue increases. We are more vulnerable to an oil patch downturn than ever before.
One idea would be to identify new revenue streams less vulnerable to business cycle compared to oil. Jiggering with taxes can be problematic. It can be hard to predict how untried changes might affect tax collections. The state’s current revenue flush status provides an opportunity to experiment. If a change generates less revenue than expected, the budget surplus is there to cover short falls.
With this in mind, one idea would be to take a swing for the fences and enact a major overhaul of the state’s tax system. Enacting a value added tax is a reform that has been discussed frequently in the past. This could replace the gross receipt tax, the personal income tax and the corporate income tax all at the same time.
Because it is so broadly based, a VAT is less sensitive to business downturns and could serve as the underpinning for a new tax system less sensitive to the vagaries of oil markets.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He has studied the New Mexico economy for the last 32 years.