Virus and oil price cash shift budget reality

The following article appeared in the Current Argus on March 13, 2020

With Coronavirus grinding travel and much of society to a halt and oil prices having crashed, there is little chance the budget passed during the 2020 Legislature will survive the year without some major revisions.

Even prior to the session ending Senate Finance Committee Chairman John Arthur Smith said, “I don’t think any of us can walk away from here and say the spending was controlled, we’re skating on very thin ice from a spending standpoint.” It’s hard to argue with that considering that Governor Lujan Grisham and the Legislature grew government by 20% (from $6.3 billion to $7.6 billion in just two years)

They should have seen this coming. Even as the Legislature met the price of a barrel of oil was dropping. On January 6, 2020 oil was $63.27 a barrel. It dropped to $42 a barrel before the Russians and Saudis announced their price war which further reduced oil prices to about $30 a barrel. Since oil and gas comprise 40 percent of New Mexico’s budget a sustained price war makes a special session very likely.

The Legislature didn’t learn their lesson of the last decade during which New Mexico experienced stagnant economic growth due to declining oil prices. Price dropped from over $100 a barrel to less than $50 a barrel over a few short weeks in late 2014. And, despite Gov. Susana Martinez’s efforts to address systemic problems in New Mexico’s economy, the Democrat-controlled Legislature opposed her at every turn. New Mexico typically underperforms its neighbors economically, but that situation grew far more apparent as New Mexico’s oil dependency was exposed.

By the time Michelle Lujan Grisham and a new band of more “progressive” Democrats took over at the start of 2018 New Mexico was suddenly awash in revenue thanks to new discoveries in the Permian Basin. But, did we get policy reforms designed to diversify New Mexico’s economy? Not at all.

While they talked a lot about “diversifying” New Mexico’s economy the Legislature did nothing of the sort. Instead they enacted numerous tax hikes and regulations that make New Mexico even less friendly to business. We are more dependent on the volatile oil and gas industry than before.

In 2019 the Legislature adopted HB 6, the largest tax hike in New Mexico history. Among many economically-harmful provisions, that law increased personal income taxes which disproportionately impacts small business. Excise taxes on new cars were also increased by 33%.

The controversial Energy Transition Act is also going to make it harder to attract energy-intensive manufacturing operations. The Act is already impacting the Four Corners economy directly with the shutdown of San Juan Generating Station coming soon, but the cost of shifting from coal to “renewables” is going to be substantial for all PNM rate payers. Businesses will avoid uncertainty and set up shop where electricity prices are not as expensive or likely to rise in the future.

The biggest problem of the past two years was that no pro-business tax relief was passed and no reforms were made to the onerous and problematic gross receipts tax. And, rather than embracing needed reforms like “Right to Work” or “Davis Bacon” prevailing wage laws, the Legislature and Governor teamed up in this year’s 30 day session to allow more time consuming and costly complaints to be levied at construction businesses (SB 98) and for local governments to face higher labor costs and labor forces that are harder to work with (HB 364).

Will we suffer the same economic stagnation if prices remain depressed? It is hard to say for sure. This is a volume-driven boom and is not as price-dependent as prior booms. But, if prices remain too low, the Permian Basin producers will reduce activities or pull out completely. That means fewer jobs and tax dollars.

What happens next is anyone’s guess, but we do know all 112 members of the Legislature are up for election in November.

Gessing is president of New Mexico’s free market think tank, Rio Grande Foundation