December forecast trims recurring revenue; corporate tax hit from federal HR 1 cuts "new money" to about $105.7M

Forecasters told the Legislative Finance Committee that New Mexico’s recurring revenue picture weakened in the December consensus forecast, largely driven by a sharp drop in corporate income tax collections tied to the federal budget reconciliation bill commonly called HR 1 and by lower oil prices.

"This is the first time since the pandemic revenues are decreasing year over year," Ismael Torres, chief economist to the Legislative Finance Committee, told lawmakers, summarizing the panel’s main concern that recurring revenue is now smaller than previously projected.

Why it matters: The state’s "total new money"—the recurring revenue available above current appropriations—was revised downward from about $484.8 million in August to roughly $105.7 million in the December consensus estimate, limiting room for new, ongoing spending when the Legislature convenes in January. Forecasters said the drop is driven mainly by an approximately $320 million combined decline in base corporate income tax and pass‑through entity withholding for FY26 and by legislative tax changes that reduced personal income tax receipts.

Key figures and mechanics: Presenters attributed the corporate revenue decline to three main channels in HR 1—100% bonus depreciation, expanded expensing deductions and a reinstated federal research deduction—and to behavioral changes by taxpayers drawing down carryforward credits. The session heard an estimated annual state income tax (SIT) revenue loss due to HR 1 of about $204.7 million for FY26 and roughly $211.4 million for FY27. Separately, the Department of Finance reported a nonrecurring State Land Office lease sale that raised an estimated $362.6 million in FY26; the consensus group coded those receipts as nonrecurring, which partly insulated the general fund in the near term.

Reserves and risk: Officials said reserves remain strong in aggregate—about 31.1% at FY25 close and projected about 31.2% for FY26—but warned liquidity and access matter: a significant share of reserves is invested and not immediately liquid. Stress testing presented to the committee showed a worst‑case scenario (including a sharp oil price collapse) could require roughly $2.1 billion in reserves or reductions to balance recurring spending.

What lawmakers asked: Committee members pressed economists on the carryforward risk—officials said corporate carryforward credits totaled about $220 million before the most recent quarter, with approximately $75 million drawn down in one quarter, leaving about $145 million still at risk of being drawn in future quarters. Members also discussed executive‑order spending and options to capitalize an emergency revolving fund to reduce ad hoc executive spending pressure.

Next steps: Forecasters emphasized uncertainty tied to pending IRS guidance, corporate behavior and missing federal economic data (some series were delayed by the federal government shutdown earlier in the year). The committee framed the near‑term policy choice as prioritizing nonrecurring one‑time spending over new recurring commitments unless revenue signals improve. The December forecast will inform budget bill and appropriation discussions when the Legislature meets in January.

Sources: Presentation to the Legislative Finance Committee and the Department of Finance and Administration’s December consensus revenue forecast.