State's Revenue Picture Improves

State lawmakers will have $199 million in “new money” to spend in the upcoming 30-day legislative session, thanks to an improving economy and higher oil and gas prices.

But, despite the improving economy, there are still reasons for lawmakers to be cautious about spending that money, according to a new revenue forecast released Monday the the state's Legislative Finance Committee.

Those risks include falling federal revenue because of pending federal tax cuts, continuing volatility in oil and gas prices and a loss in tax revenue due to the large number of tax exceptions the state offers to businesses.

"The economy is growing and revenues are rebounding, projected FY18 recurring revenues rising to $6.1 billion, $149.6 million more than the August 2017 consensus estimate,” the LFC's report said. “Attachment 1 (page 12) also shows projected FY19 revenues rose by $174 million to $6.3 billion, and 'new money,' defined as FY19 projected recurring revenue less FY18 recurring appropriations, is $199 million, or 3.3 percent of recurring appropriations. These increases are welcome news after two years of mostly declining revenue estimates and the need for significant solvency measures in the 2016 and 2017 regular and special legislative sessions. However, optimism based on rising revenues should be tempered with caution due to many significant risks (see revenue risks section on page 2).”

State government gets about a third of its general fund revenue from the oil and gas industry, and the continuing global glut of oil could send oil prices down again, the LFC's report said.

“New Mexico’s dependence on the energy sector makes the state especially sensitive to oil market volatility,” the report said. “A significant portion of the state’s revenues are generated from the activities of the petroleum industry. This includes not only direct revenue from severance taxes, bonuses, rents, and royalties, but also includes income taxes from oil companies and industry workers, gross receipts taxes on drilling activities, and other worker spending.

“Oil companies with operations in the Permian basin have relied on high production levels to offset low prices, a strategy that has required expansion of horizontal drilling techniques, increased efficiency with fewer workers per rig, and lower breakeven costs. Despite these coping techniques, there is risk of sudden oil price drops if global inventories remain high, OPEC changes tactics, or demand does not meet expectations, and this could trigger a pullback in production and another significant downturn in state revenues.”

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