Committee advances bill to equalize oil and gas effective tax rates

The House Energy, Environment & Natural Resources Committee on Feb. 27 voted to advance House Bill 548, the Oil and Gas Equalization Tax Act, a proposal to align the state's effective tax rates on oil and natural gas.

The bill would change tax treatment so that oil and natural gas face the same effective severance tax rate; sponsors and Legislative Finance Committee staff told members the current effective rate is roughly 3.15% for oil and 4% for natural gas. Committee members and outside witnesses debated expected revenue, impacts on drilling decisions and who would ultimately bear the costs.

Supporters said equalizing the rates corrects a decades-old inconsistency and would provide recurring revenue the legislature could use for priorities such as affordability measures or other recurring needs. Representative Isaac Small, sponsor of HB 548, told the committee the mismatch dates to the 1990s and that equalization would make the tax treatment more consistent: "We've never gone back to address the unequal nature of the natural gas and oil tax rates in New Mexico," Small said. He and Legislative Finance Committee staff said the state remains competitive on effective tax rates relative to other producing states, and noted that, under SB 26, direct severance revenues go into the severance tax permanent fund after FY25; the sponsor argued the new measure would direct recurring revenue to the general fund to support programmatic priorities.

Opponents — including industry trade groups and local chambers of commerce — said the change would raise the cost of doing business in New Mexico, threaten investment by smaller independent operators and could lead to reduced production, lost royalties and job losses in producing counties. Ashley Wagner, vice president of government affairs for the New Mexico Oil and Gas Association, said HB 548 "decreases the economics of wells in New Mexico making our state a less attractive option for development and production," adding that lower production could reduce state revenue over time and increase the risk of abandoned assets. Kyle Armstrong, president and CEO of Armstrong Energy Corporation, warned committees to scrutinize projected impacts and asked for a clear purpose for any new revenue. "My company ran projections based on current tax rates and the new proposed rates. It certainly appears to result in new tax dollars, but it also leads to premature shut-ins and a loss of royalty revenues," Armstrong said during testimony.

Fiscal staff and the sponsor discussed the bill's expected yield. Members referenced the committee's Fiscal Impact Report (FIR), which staff summarized as projecting roughly $395 million in FY26 rising to about $445 million in FY29 in additional revenue under the bill's scenarios. LFC staff and the bill sponsor emphasized the estimates contain uncertainty and that some external studies indicate small negative elasticities of production to tax increases; LFC's chief economist said the effective-tax comparisons to other states are obtained by dividing total tax revenue by the total value of production.

Committee members pressed the sponsor on timing, stakeholder outreach and the distribution of any revenue. Representative Montoya and others urged more stakeholder engagement and asked whether lowering the natural gas rate rather than raising oil's effective rate had been considered; Representative Small replied that reducing the gas rate would create a material budget hole. Several members also raised differential regional impacts, noting the San Juan Basin produces more gas and could be more exposed to rate changes affecting smaller "stripper" wells.

The committee approved a do-pass motion on HB 548. The roll-call vote recorded seven "yes" votes (Representative Abeyta, Representative Dixon, Representative Garcia, Representative Gorilla, Representative Small, Vice Chair Cedeno and Chair McQueen) and four "no" votes (Representative Henry, Representative Montoya, Representative Murphy and Representative Senna Cortez). The motion was moved from the floor by Representative Serna and seconded by Representative Dixon according to the committee record.

What happens next: the committee referred HB 548 to the next committee in the legislative process. The FIR and testimony showed disagreement about the size of production effects; the bill's fiscal numbers and any eventual appropriations or policy offsets will be subject to further review on the tax and appropriations tracks.

Notes: committee discussion referenced SB 26, the severance tax permanent fund and the emergency school tax as part of the broader fiscal context. LFC chief economist Ishmael Torres was present as a technical witness and answered questions about the FIR methodology and effective-tax comparisons.