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LFC: New Mexico faces revenue volatility from oil, federal cuts; recommends stabilizing measures
Summary
Legislative Finance Committee economist Ismaya Torres told the Revenue Stabilization & Tax Policy interim committee that falling oil prices, potential federal cuts to Medicaid and SNAP, and recent tax changes leave New Mexico exposed. The LFC urged planning, stronger reserves and program evaluation to manage long‑term risk.
Ismaya Torres, chief economist for the Legislative Finance Committee, told the Revenue Stabilization & Tax Policy interim committee in Santa Fe that New Mexico’s state budget remains vulnerable to swings in oil prices and potential federal policy cuts, and urged the Legislature to build stabilizing measures and better align spending with long‑term revenue projections.
Torres said the state’s revenue mix — heavy on gross receipts, energy‑related taxes and large investment earnings — produces volatility. “New Mexico is the fourth most volatile state in the country when it comes to revenues largely because of our activity as a mining state,” Torres said during the presentation titled “Post‑session economic and revenue update.”
The presentation outlined several drivers of near‑term risk: a vetoed state tax package (House Bill 14) that would have reduced state revenue by roughly $120 million if enacted; the sensitivity of state collections to oil prices (LFC estimates a $1 change in average annual oil price changes revenue by about $50 million); and possible federal reductions in Medicaid and SNAP that a Tax Policy Center estimate suggests would disproportionately affect New Mexico. Torres described a hypothetical federal backfill scenario of roughly $1.5 billion for illustrative purposes and called it not a firm estimate but a scenario to test fiscal resilience.
Torres showed LFC stress‑test scenarios that ranged from modest to substantial revenue declines and said nonrecurring appropriations — which rose to about $3 billion in recent years — would be the first area to absorb cuts in a downturn. “Recurring spending has remained low enough that recurring cuts would not have to be necessary in these kinds of scenarios, but the nonrecurring pool would have to be reduced or clawed back,” Torres said.
Committee members asked about specific lines of exposure. Senator Antoinette Sadio Lopez asked Torres to clarify the practical size of a liquor excise change presented earlier; Torres agreed that a 20% increase in the excise rate could amount to a fraction of a cent per drink and said presenting both the percentage change and the per‑unit change would be more transparent. Representative Patty Lundstrom and others pressed for metrics and the LFC’s evaluation approach for tax incentives; Torres said the LFC will use an input‑output dynamic model (REMI) and will evaluate job creation and private investment effects among other metrics.
Torres urged a disciplined approach to long‑term budgeting. She presented what LFC staff call “Goldilocks charts” showing budget growth paths and recommended a 6% annual budget growth target as a rule of thumb that balances recurring commitments and nonrecurring flexibility. Torres warned that permanent tax cuts are the fiscal equivalent of recurring spending and said delayed implementation of tax cuts increases risk because future declines could make them unaffordable.
Several members sought follow‑up analysis. Representative Mark Murphy asked for a clearer inventory and description of the state’s reserve and trust funds; Torres said LFC will provide balance‑sheet tables and noted that some funds (for example, the land grant permanent fund) are constitutionally protected and not practical for emergency general‑fund use. Senators and representatives requested additional modeling that ties projected oil‑and‑gas declines to required investment returns or reserve sizes to replace lost revenues over time.
Torres also flagged longer‑term structural issues: New Mexico’s reliance on energy revenues has made recent decades unusually volatile compared with earlier 20‑year periods of stability, and while investment earnings have smoothed near‑term collections, the state should continue strengthening reserves and evaluating tax expenditures and economic development incentives.
The committee did not take formal action on the LFC presentation but asked LFC staff to return with follow‑up materials, including reserve inventories, incentive evaluations and stress‑test scenarios.
Ending: The committee scheduled follow‑up work in August and asked LFC staff to supply the requested charts and fiscal playbook materials so members can evaluate tradeoffs as they develop a bipartisan tax package during the interim.
