New Mexico cuts FY26 recurring revenue outlook as income taxes fall; state land office spike partly offsets loss

New Mexico budget staff told the Revenue Stabilization and Tax Policy Committee on Tuesday that recurring state revenue is weaker than expected for fiscal 2026, driven mainly by declines in corporate and personal income tax collections and shifting taxpayer behavior.

Ismael Dorris, chief economist for the Legislative Finance Committee, said the committee’s headline “new‑money” figure for the next budget year is about $105 million — meaning limited capacity to expand total appropriations without cutting or reclassifying other spending. “If you take a magnifying glass to ’25–26, you might see that appropriations actually exceeded revenues in those two years,” he said. The $105 million reflects total estimated revenue less prior appropriations and nonrecurring spending.

Taxation and Revenue Department analysts and DFA staff described several drivers of the downgrade. Secretary Stephanie Chardonn Clark said the corporate income tax (SIT) outlook was substantially reduced for FY26 — a base reduction on the order of hundreds of millions — and that pass‑through and other SIT components added to the downward revision. TRD’s presentation attributed a large part of the change to provisions in the recently enacted federal budget bill (referred to in the record as HR 1), including bonus depreciation, expanded first‑year expensing and changes to research deductions, as well as the continued effect of the SALT cap.

TRD estimated the total SIT revenue loss associated with HR 1 at roughly $204.7 million in FY26 and about $211.4 million in FY27, while also noting uncertainty from pending IRS guidance and future taxpayer behavior. TRD staff also pointed to an unusual change in corporate payer behavior: firms drew down carryforward credits quickly (about $72 million in one quarter), producing a negative net quarterly payment in that period and leaving roughly $140 million of credits available on accounts.

Department of Finance and Administration economist Leo Delgado said those SIT and PIT corrections pushed recurring revenues down in FY26 by a larger amount than the August forecast. He pointed out an offset in fiscal 2026: State Land Office lease and bonus receipts are projected in the estimate at $511.9 million for FY26, but the consensus group coded that windfall as nonrecurring. “We coded it as nonrecurring, reflecting that it is not expected to continue in future years,” TRD said.

Committee members pressed officials on policy responses. Representative Chandler asked whether the state can “decouple” its corporate income tax definitions from the federal code to blunt HR 1 effects; TRD said decoupling is possible but would add compliance complexity for taxpayers. Officials said the administration is discussing options but did not commit to a specific legislative package.

On reserves and fiscal flexibility, DFA observed that estimated reserves remain high on paper (about 31.2% for FY26 pending legislative actions) but that much of that money is in less‑liquid or legally constrained accounts (behavioral health trust, tax stabilization reserve requiring a two‑thirds vote). LFC stressed the role of executive‑order spending (about $243 million in the last year) in shrinking the state’s operating “checking account,” saying continued EO outlays can convert $105 million of new spending capacity into a deficit unless choices are made.

What’s next: staff flagged multiple downside scenarios in a stress test including a moderate recession and a low oil price shock that would materially widen the gap between recurring appropriations and recurring revenues. Officials recommended continued monitoring of corporate quarterly activity and IRS guidance on HR 1 implementations; they also recommended that lawmakers consider tradeoffs between recurring and nonrecurring spending as the session approaches.