With the gavel set to fall in the Land of Enchantment, the Second Session of the 54th New Mexico Legislature brings with it several unknowns. However, one constant remains: the contribution of the oil and gas industry to the state budget.
The New Mexico Legislature convenes in Santa Fe on the third Tuesday in January of each year. The Legislature holds 60-day sessions in odd-numbered years and 30-day sessions in even-numbered years. While New Mexico Gov. Michelle Lujan Grisham has completed her first session, which met Jan. 15-March 16, this will be her first time to preside over a session laser-focused on appropriation and taxes. The schedule is as follows:
• Dec. 16, 2019 – Jan. 17, 2020: Legislation may be prefiled.
• Jan. 21: Opening day (noon)
• Feb. 5: Deadline for introduction
• Feb. 20: Session ends (noon)
• March 11: Legislation not acted upon by governor is pocket vetoed.
• May 20: Effective date of legislation not a general appropriation bill or a bill carrying an emergency clause or other specified date.
During 30-day sessions, the Legislature may consider only appropriations and revenue bills, bills drafted pursuant to a special message of the governor, and vetoed bills from the previous session.
“Whether we will get anything outside the realm of budget and revenue remains to be seen,” said Mike Miller, government affairs spokesman for the Permian Basin Petroleum Association (PBPA) in New Mexico, referring to the governor’s authority to add items to the legislative call.
Miller will be at the capitol every day, all day monitoring legislation.
“We will be prepared to support and advocate for funding for critical infrastructure in Southeast New Mexico,” he stated. “In addition, we will be there to play defense when needed.”
The Oil Industry and State Coffers
As House and Senate members prepare to prefile bills, interim committees continue to review reports related to the state’s revenue stream. One committee in particular has been busy sharing data and conducting hearings.
During its September and October meetings, the Interim Revenue Stabilization and Tax Policy Committee agenda included items related to the effect of the oil and gas industry on the state’s budget and economic outlook. The overall message included this perspective: the industry continues to be a major contributor to state coffers, but lawmakers should resist relying on these volatile funds.
During the September meeting, Dawn Iglesias, chief economist, and Ismael Torres, economist, for the Legislative Finance Committee shared a presentation on the state’s fiscal stability. Iglesias clicked through a series of graphs that illustrated how volatile specific revenue sources performed from FY05-FY15 compared to FY15-FY19. Most notable were the revenue sources funded by oil and gas activity, such as rent and royalty payments and severance taxes, which are increasing in volatility. Iglesias cautioned lawmakers from relying on current revenue levels from these funds as she described them as unreliable. Instead, she encouraged lawmakers to develop policies that would create more stable funds by investing volatile revenue sources into budget stabilization funds.
Iglesias cited the “rainy day fund” passed in 2017 as a good start, but she also recommended that lawmakers look at examples from other states (such as Utah and Virginia) that have formal processes to manage revenue fluctuations. Iglesias concluded by suggesting that lawmakers should budget at least 25 percent in reserves in order to be prepared for a decline in oil production, which could decrease the budget by $1.4 billion in just one year.
Mine Yucel, senior vice president and research advisor at the Federal Reserve Bank of Dallas, provided the committee with an update on oil and gas productivity worldwide. Yucel discussed the attacks in Saudi Arabia and stated the market has nearly recovered with the price of oil rebounding to $56 a barrel, which is what it was at the time of the attack.
In addition, Yucel said she expects that the market will be slightly oversupplied in 2020, which could bring the price of oil down even further.
Yucel attributed the recent job growth in the state (2.6 percent this year compared to 1.2 percent last year, or approximately 20,000 jobs) to the increasing activity in the Permian Basin that is bringing construction and oil and gas sector jobs, which have increased by 12.3 percent and 5.3 percent respectively over last year.
The outlook for natural gas was less encouraging, as reported by Yucel, due to oversupply.
Finally, John Tyssleing, consulting director at Moss Adams LLP, compared the different costs to the industry imposed by the government in nine producing states. These costs include taxes, land income, fees and regulatory costs, and investment income. New Mexico was third (11.5 percent), behind Texas (12.8 percent) and Montana (12.8 percent), when calculating the percentage of production that is paid in taxes. However, when calculating all the costs, New Mexico’s contribution to the state budget as a percentage of production was far higher than the other states at nearly 21 percent, or almost 5 percent higher than the next state (Wyoming) at 15.3 percent.
Tyssleing attributed New Mexico’s high number to the fact that some 80 percent of oil and gas activity in the state occurs on state or federal land, which provides the state an additional revenue source most other states do not have.
“I guess you just have to say thank you to the industry,” Tyssleing shared.
The Interim Legislative Finance Committee also noted the fluctuating nature of the industry in its FY 2021Appropriation Request Guidelines: “…the state’s strong reliance on the oil and gas industry creates a highly volatile tax structure in which revenues boom and bust along with the energy sector. A tax reform package that broadens the GRT base and lowers rates would help stabilize this revenue and alleviate burdens on taxpayers created by the high rates. The state needs time to digest the recent tax changes, before addressing outstanding issues in the state’s tax structure.”
Tax changes were addressed in the first session of the 54th Legislature in House Bill 6 and include combined tax reporting and deductions for foreign-source dividends. The Senate amendments removed increases in personal income taxes and capital gains increases. Amendments added included:
increased working family tax credits;
reduced capital gains from 50 percent to 40 percent;
newly established top personal income tax rate of 5.9 percent contingent on FY20 general fund recurring revenues;
increased motor vehicle excise tax from 3.5 percent to 4 percent (the incremental .5 percent goes to the general fund for two years and thereafter goes to the road fund);
Internet sales technical correction; and
eCigs/Vaping language change.
PBPA on the Watch
Up to this point, potential call items outside the scope of budget and revenue are up in the air, Miller reiterated. However, should they arise, Miller will engage and evaluate the effect on the industry. For example, Gov. Lujan Grisham assembled a task force to study the legalization of recreational marijuana.
A bipartisan proposal to legalize recreational cannabis through state-run stores narrowly won New Mexico House approval during the first session but stalled in the Senate. It was the first time a recreational marijuana bill passed a chamber of the New Mexico Legislature.
Should the governor add the issue to the call, “we have to pay attention to that,” Miller indicated. “For example, one important concern is potential impact on the workplace and workers’ compensation.”
The PBPA had a voice during the first session of the 54th Legislature, Miller observed. Most bills are assigned to two committees in each chamber, and the majority of the time Miller felt welcome to share testimony and offer industry perspective.
“We were able to communicate with the new administration,” Miller offered. “We were able to establish relationships, and I just thought we had a really good session. We are going to keep all of that going.”
For more information on the New Mexico Legislature, go to https://pbpa.info/.
Julie Anderson, based in Lubbock, is editor of County Progress Magazine, and is well known to many readers of PBOG as the prior editor of this magazine.