(The Center Square) – A new report from the Pew Charitable Trusts says that New Mexico had the fourth highest volatility in tax revenue collection over the past 20 years, primarily due to its reliance on sales taxes and severance taxes on the oil and gas industry.
Pew ranked New Mexico at 10.2 for fiscal years 2000 to 2019. Only Alaska (36.9), Wyoming (16.4) and North Dakota (13.3) ranked higher.
The authors of the study explain in their summary that their analysis “removes the estimated effect of state tax policy changes, which state lawmakers control, to calculate a volatility score for the underlying trends in each state’s overall tax revenue and major taxes – those that account for at least 5 percent of its tax revenue on average over the past decade.”
A lower score indicates a more constant revenue stream from year to year, while a higher score indicates dramatic fluctuations.
The average score across all 50 states was 4.96.
Paul Gessing, president of The Rio Grande Foundation, a free-market think tank located in Albuquerque, said his group would like to see New Mexico embrace a broader approach to economic freedom.
“We’re a donut hole in the middle of Arizona, Utah, Colorado and Texas, which are all growing and rank high in economic freedom,” he said. “We just haven’t had a legislature willing to embrace free-market reforms.”
The Pew authors also point out that the top four states for volatility are all rich in natural resources and use severance taxes as a large revenue stream.
Over the past decade, New Mexico has relied on oil and gas taxes for 16.1 percent of its overall revenue. That tax scored 32.9 rating for volatility, the highest among the three main taxes in the state that were included in the study.
This year, the oil and gas industry has suffered from significantly less demand because of travel restrictions put in place to slow the spread of COVID-19, as well as a production war between Saudi Arabia and Russia, leading to an overabundance of supply. That could further inflate the volatility rating.
“We’re definitely tied into a reliance, or an overreliance, on oil and gas revenue,” Gessing said. “We’re in the beautiful southwest and people are moving here, but our population isn’t growing as fast as the surrounding states. That makes it hard to diversify the economy.”
Personal income taxes in New Mexico scored a 10.5 and accounted for 22.5 percent of tax revenue over the last 10 years, while the sales tax scored a 10.2 and provided 38 percent of tax revenue.
While primarily meant to be a look at just the numbers, the authors recommended that legislators pay more attention to volatility so they can “harness tax growing in good years to cushion the lean years.”
Examples they suggest include putting above average revenue into a rainy day fund and restricting spending from particularly volatile revenue streams.