preliminary report january, 2014 · 2018. 4. 4. · •fy2013 general fund contributions from oil...

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NEW MEXICO TAX RESEARCH INSTITUTE Fiscal Impacts of Oil and Natural Gas Production in New Mexico

Preliminary Report

January, 2014


Tabular Summary of Study Results • FY2013 General Fund contributions from oil and natural gas production

FY 2013 General Fund

Category Amount ($ millions) OGAS Attributed Amounts ($ millions) Approx. %

OGAS Gross Receipts Tax $1,912.7 $127.5 6.7% Compensating Tax $50.7 $14.8 29.2% Selective Sales Taxes $405.2 >0 0.0% Net Personal Income $1,225.7 $120.3 9.8% Corporate Income Tax $263.0 $54.0 20.5% Oil & Gas School Tax $385.0 $385.0 100.0% 7% Oil Conservation $21.2 $20.2 95.2% Resources excise $15.1 $0.0 0.0% Natural Gas Processors $24.2 $24.2 100.0% Perm. Fund Income $440.9 $425.9 96.6% Sev Tax Income Fund $176.2 $151.5 86.0% Federal Mineral Leasing $459.6 $407.6 88.7% Land Office Income $44.6 $30.3 68.0% All other categories $166.2 $0.0 0.0%

Recurring General Fund/Total $5,590.2 $1,761.2 31.5% • Percentage of LGPF attributed to Oil and Natural Gas Production

96.6% • Percentage of STPF attributed to Oil and Natural Gas Production

86% • Percentage of General Fund Attributed to Oil and Natural Gas Production

31.5% • FY 2013 Severance Taxes Paid to STBF and a portion thence to STPF (after bond repayments)

$419,992,937, with $0 to STPF • FY 2013 Severance Tax Bond projects

769 projects for $218,132,000 (of which $207,225,000 is attributed to Oil and Natural Gas production – Severance Taxes) • 7-year total Severance Tax Bond Projects

$1,449,994,000 (of which, $1,248,767,000 attributed to Oil and Natural Gas production (severance taxes paid)


• FY 2013 Ending Balance in STPF $3,873,169,911

• FY2013 Royalties paid for production on State Lands1

$494,082,929

• FY2013 Bonus Payments to SLO for the right to produce on State Lands $30,349,730

• FY 2013 Ending Balance in LGPF $13,280,000,000

• Royalties Paid to MMS for production on Federal of which a portion is returned as federal revenue sharing $835,156,988, with $407,603,643 returned as revenue sharing

• Royalties paid for production on Indian Lands $31,118,909

• In Lieu of School and Severance Taxes paid for production on Indian Land $3,159,824

• Total Ad Valorem Production Taxes paid $126,391,042 (approximately $6.3 million for state GO Bond Debt Service and $120.1 million for all local property tax beneficiaries)

• Total Ad Valorem Production Equipment Tax Approximately $79.4 million (approximately $4.0 million state GO Bond Debt Service and $75.4 million for all local property tax beneficiaries)

• General Fund School Support to 89 local school districts (31.5%) $714,223,614

• General Fund Higher Education Funding (31.5%) $227,797,800

1 Note: this is the amount reported by SLO. From ONGARD, the reported royalties for FY 2013 production year were $500,922,225. This difference will be diagnosed and reconciled in the next phase of this study.

Impacts of Oil and Natural Gas Production in New Mexico on the State General Fund January 2014

– 1 –

Impacts of Oil and Natural Gas Production in New Mexico on the State General Fund

Introduction: In September, 2013, the New Mexico Oil and Gas Association (NMOGA) contacted the New Mexico Tax Research Institute (NMTRI) to assess interest in having NMTRI research, analyze and report on the direct and indirect economic impacts of the Oil and Gas exploration, drilling and production industry in New Mexico. The query and implicit RFP fit nicely into a “retirement project” of NMTRI’s principal investigator (“PI”), Laird Graeser. The project is to research and write a definitive history of revenue and public finance in New Mexico starting from the first property tax imposed in the State to fund free public education. This is an ongoing story. However, NMOGA offered financial support to NMTRI and the PI to investigate and document the portions of the overall story having to do with oil and gas production in the state, the role of the oil and natural gas production industries on the state’s capital outlay through the severance tax bond fund and the proportion of the General Fund that the oil and natural gas industry can plausibly claim to “own.” That is, what proportion or percentage of the General Fund, which is used to fund public school education, higher education, Medicaid and some other public welfare programs, general government, environmental protection, tourism support and promotion and economic development efforts , will reasonable people, when presented with unbiased analysis and data, understand is attributable to current or historical taxes, royalties and other money paid by the oil and gas production industry in New Mexico. Throughout this report, the phrase “OGAS” means “oil and natural gas production.” The NMTRI and PI proposed the following: • The study would be divided into phases, with each phase extending the analysis into different areas. The

results of each phase would be available prior to each annual legislative session and each phase would update the previous phase’s data gathering and analysis. It is expected that there will be new areas to explore after the initial phase for approximately three phases in total.

• The phase 1 study would determine the plausible total contribution of the industry to the State General Fund for FY 2013 that would include not just the traditional reckoning of emergency school tax, natural gas processor’s tax, the conservation tax and federal royalty sharing, but other revenues contributed by the industry. The most important non-traditional inclusion in this reckoning is interest paid to the General Fund from the Land Grant and the Severance Tax Permanent Funds. Also to be included in the phase 1 study would be the economic burden of the Gross Receipts Tax paid by members of the OGAS industry for oil and gas support services, drilling and petroleum production. Finally, working with Taxation and Revenue Department, the study will also determine the OGAS contribution to personal income tax withholding, oil and gas withholding and compensating tax.

• The phase 1 study would then determine, on a county-by-county basis, the contribution of OGAS to each county – directly, in terms of the ad valorem production and production equipment taxes in the producing counties, and indirectly, in terms of the amount of General Fund support of K through 12 public schools, charter schools and higher education. If time allowed, the phase 1 study would determine the contribution of the industry to capital outlay, whether the local capital projects in each county were funded via General Fund appropriations or Severance Tax Bonds. Thus, the phase 1 study would generate a partial economic impact estimate for producing and non-producing Counties.



• To ensure that the study would be independent and professional, NMOGA would fund a portion of the research, analysis, documentation and report-writing, but not all. (Note, as of 1/19/14, NMOGA has funded approximately 1/3rd

• To ensure preservation of all of the rare, antique data gathered in the course of the project, NMOGA would provide a website or cloud location for the PI and NMTRI to mount a searchable database of all of the data developed in the course of the study.

the cost of the phase 1 study reported here.) NMOGA would have the unlimited right to all data, data tables and would have the right to republish any portions of the final report, but would not own the copyright.

• The most important task in phase 2 of the study will be to reconcile the various data sources to improve both the LGPF and the STPF models. These reconciliations will not materially affect the estimate of OGAS attribution to the General Fund performed in phase 1, but will provide an increased level of confidence in the models.

• Phase 2 will then extend the study to other General Fund revenue sources that can be attributed to OGAS. These may include motor vehicle excise tax and insurance premiums tax. Via survey of the OGAS industry, we might be able to refine the CIT attribution and the compensating tax and PIT withholding directly attributed to OGAS. The survey would also extend the “economic burden” analysis for Gross Receipts Tax to all other categories of taxable purchases and extend the analysis to MVX and insurance premiums tax. With all these extensions and refinements, it is expected that OGAS will be able to claim that approximately 33+% of the General Fund is attributed to the industry.

• Phase 2 will also extend the study to other General Fund supported programs that can be assigned to counties. These areas would include public school transportation, “below-the-line” school grant programs, pre-K education funding, Medicaid funding, other state-funded income support, LICTR and elderly property tax rebate.

• Phase 3 will extend the analysis to some Other State Funds, including unemployment insurance (direct and indirect) and the State Road Fund.

• In phase 3, as well, working with Taxation and Revenue Department, we will attempt to assign personal income tax withholding and total personal income taxes paid by oil and gas industry employees to counties and refine the assumption that PIT withholding and Oil and Gas Withholding are good surrogates for net personal income taxes contributed by employees and contractors to the industry.

• In phase 3, we might also be able to piggy-back on an NMSU IMPLAN study of direct, indirect and induced employment effects of OGAS to claim a greater amount of PIT withholding than in Phases 1 and 2. This extension might increase the percentage of the General Fund attributed to OGAS to 34%.

The proposal was accepted and work began in late September, 2013. Accomplishing these various analytic tasks required unearthing and assembling a vast amount of data. In some cases, the data were gathered from 1986-2001 when the PI was chief economist for the New Mexico Taxation and Revenue Department (TRD) or from 2006-2010 when the PI was chief economist for the Department of Finance and Administration (DFA). Other data were obtained from the Anderson School Library at UNM or the Oil Recovery project at New Mexico Institute for Mining and Technology (NMIMT). Data for the Land Grant Permanent Fund (LGPF) model were obtained directly from the State Land Office (SLO), where staff graciously provided access to the entire series of annual reports of the State Land Commissioner. These data will be discussed later in the report as supporting the individual taxes and revenue sources contributing to the State General Fund, the Severance Tax Bonding Fund (STBF) and County-level capital outlay, operating and school



funding from the same revenue sources as the State General Fund. These data will be made available to other researchers through a mechanism to be developed. Summary of Results: The following table exhibits the significant findings of this project:

Fund or Program Revenue Detail % Attrib. to OGAS Severance Tax Permanent Fund Interest transferred to the General Fund for FY 2013

attributable to OGAS. 86 %

Land Grant Permanent Fund Interest transferred to the General Fund for FY 2013 attributable to OGAS.

96.6%

State General Fund GRT paid by industry in OGAS-related categories, CIT, PIT withholding , OGAS withholding, Emergency School Tax, Conservation Tax, Natural Gas Processors Tax, STPF interest, LGPF interest, federal royalty sharing and SLO revenues, for FY 2013 attributable to OGAS.

31.5%

School funding (State Equalization Guarantee)

General Fund portion of K-12 education attributable to OGAS.

31.5%

Higher Education funding General Fund portion of Constitutional institutions attributable to OGAS for FY 2012 and FY 2013.

31.5%

Severance Tax Bonds 2007-2013 STBs total listed by County and portion attributable to OGAS.

95% 5-year average

There are some intriguing results in this table. The percentage attributable to OGAS for the severance tax permanent fund (STPF) from the fund’s inception in 1973 to date is influenced by the periodic booms in potash, molybdenum, coal and uranium as much as from the peaks and valleys of the oil and gas production cycles. Data supporting this attribution included annual bond disclosure documents from FY 1994 forward. OGAS and hard-mineral severance tax data were sourced to old Bureau of Revenue and Oil and Gas Accounting Commission annual reports, as well as TRD reports after 1978. To the extent possible, data from TRD were reconciled with bond disclosure documents available from the Board of Finance website. While there are still a few holes in the analysis, this is the most credible estimate of the OGAS contributions percentage for the STPF performed to date. The land grant permanent fund (LGPF) estimate is probably the single, most interesting aspect of the overall study. After assembling a large amount of data from Bureau of Revenue and, post-1978, from Taxation and Revenue Department reports (most of the old data was provided to the project through the invaluable assistance of Dr. Ronald P. Broadhead, principal senior petroleum geologist for NMIMT’s Bureau of Geology.) While this approach was productive and provided a credible estimate of OGAS contributions to the corpus of the LGPF, there were a number of annoying holes in the data. A somewhat casual query to the State Land Office resulted in being granted access to scans of a virtually complete set of annual reports of the State Land Commissioner, going back to the first report dated 1900. Data from these reports were hand entered into a comprehensive database, from which a highly credible and robust model was built. With an uncertainty of less than ±.5%, we assert that the current proportion of the amount of annual interest transferred to the General Fund from investments of the LGPF is 96.6%.



Before delving into some of the other General Fund revenue sources, we will discuss the two General Fund Interest models – the LGPF interest model and the STPF interest model. The General Fund Interest Models: The most interesting and useful portion of this study was to quantify the proportion of interest transferred to the General Fund from oil and gas taxes and royalties paid. In 2013, $440,876,338 in earnings from the Land Grant Permanent Fund (LGPF) was transferred, of which $425,886,542 can be plausibly and reasonably attributed to royalty payments for production on State lands made by OGAS companies. Similarly, $176,172,684 of earnings from the Severance Tax Permanent Fund (STPF) was transferred, of which $151,508,508 was attributed to the oil and gas severance taxes paid by the OGAS industry. To arrive at 96.6% for LGPF attributable to the OGAS industry in the state we had to develop data for the LGPF model extending back in time to 1900 – 12 years prior to statehood, when first the Ferguson Act and subsequently the Organic Act transferred over 12 million acres of federal land to the New Mexico Territory and then the new State of New Mexico for the purpose of providing funds for public schools, higher education and other public purposes. To arrive at 86% for STPF attributable to severance taxes paid by OGAS interests, we had to develop data for the STPF model extending back in time to 1973 when Hard Mineral and Oil and Gas Severance Taxes were restructured and the portion of severance tax collections not needed to amortize capital outlay bonds used to fund a Land Grant Permanent Fund. Of the two investigations, the far larger and older LGPF required the most data grubbing. Before discussing the data and the model, we should briefly describe the evolution of the revenue sources contributing to the corpus of the LGPF. The Ferguson Act transferred about 5,000,000 acres of federal land to the territory of New Mexico for purpose of providing for public schools, higher education, an insane asylum, a deaf and dumb school, a blind asylum, a penitentiary, a miner’s hospital, improvements to the water supply delivered from the Rio Grande and other purposes. The initial grant designated sections 16 and 36 in every township for these purposes. Almost 40% of these sections were Indian lands, Spanish or Mexican land grants, land previously patented by individuals and other types of land for which title could not be transferred. 2,000,000 acres of land, therefore – known as “in-lieu lands” or simply “lieu land” – had to be selected by a commission consisting of the Governor (M.A. Otero), the Surveyor General and the Solicitor-General of the Territory. The Ferguson Act provided some guidelines as to suitable lieu lands, but there was some contentious squabbling between Territorial and Federal interests. Laws of 1901, Chapter 74, established the office of State Land Commissioner. The initial act set the salary of the State Land Commissioner at $2,500 per annum, which was six to seven times the wages of a working cowboy. The State Land Commissioner was allowed to hire clerks to assist in the operations of the office with an initial appropriation of $1,500, which was probably enough for two or three clerks. Of course, the cowboy was provided with horses to ride, a bed in a bunkhouse and grub. This law replaced the Surveyor General on the Commission charged with designating the lieu lands with the State Land Commissioner. The first State Land Commissioner was Alpheus A. Keen, who served from 1899 to 1906, which was two years longer than the statutory authority for the position. For the entire period of Mr. Keen’s tenure, he collected revenue equal to about 10 times

Dates of Tenure

Land Commissioner

Revenue during Tenure

1899-1906 Alpheus A. Keen $462,998 1907-1918 Robert P. Ervien $3,320,975

1918 Fred Muller $980,937 1919-1922 N.A. Field $4,053,441 1923-1925 Justiniano Baca $1,942,248 1925-1926 E.B. Swope $2,182,039 1927-1929 B.F. Pankey $2,673,979 1929-1930 Autin D. Crile $3,568,894 1931-1932 L.F. Hinkle $3,514,881 1933-1936 Frank Vesely $7,905,354 1937-1940 Frank Worden $13,320,696



the costs of the State Land Commissioner’s operations. Total expenses of the State Land Office during the course of 1901 were $5,707. One other interesting note, the Ferguson Act assumed that the state would sell the land outright to farmers and ranchers, thus contributing to the settlement of the American West. However, the 1901 laws required that 5% of the money received from outright sales of land or from land contracts would be transferred to a permanent fund. At the end of calendar year 1901, the total corpus of the permanent funds stood at $70,069.


– 6 –

Land Grant Permanent Fund Model ($millions) Fiscal Years

Beginning Market Value

OGAS Royalties

Land Sales and Other Royalties

Chg in Market Value

Earnings School (Gen

Fund) Distributions

Other Beneficiaries

Fiscal Year End

Corpus

Corpus Attrib. to

OGAS

Corpus Attrib. to

non-OGAS

% OGAS, this

period

%OGAS end of period

1900-1924 $1.2 $0.0 $0.5 $0.0 $1.0 $0.8 $0.2 $1.8 $0.0 $1.8 0.0% 0.0% 1925-1929 $1.8 $0.8 $0.7 $0.0 $0.6 $0.5 $0.1 $3.3 $0.8 $2.4 56.1% 25.6% 1930-1934 $3.3 $1.4 $0.6 $0.0 $1.3 $1.0 $0.2 $5.3 $2.2 $3.1 69.2% 42.1% 1935-1939 $5.3 $6.2 $0.8 $0.0 $1.7 $1.4 $0.3 $12.2 $8.4 $3.8 88.7% 68.6% 1940-1944 $12.2 $9.9 $1.2 $0.0 $3.0 $2.5 $0.6 $23.3 $18.3 $5.0 89.4% 78.5% 1945-1949 $23.3 $17.5 $1.7 $0.0 $3.1 $2.5 $0.6 $42.5 $35.8 $6.7 91.1% 84.2% 1950-1954 $42.5 $38.5 $2.2 $0.0 $8.9 $7.3 $1.6 $83.2 $70.8 $12.5 94.5% 85.0% 1955-1959 $83.2 $75.5 $2.8 $0.0 $25.7 $21.0 $4.7 $161.5 $146.3 $15.2 96.5% 90.6% 1960-1964 $161.5 $85.6 $6.6 $0.0 $47.6 $39.0 $8.6 $253.8 $232.0 $21.8 92.8% 91.4% 1965-1969 $253.8 $116.5 $6.2 $0.0 $81.2 $66.6 $14.6 $376.5 $348.4 $28.0 94.9% 92.6% 1970-1974 $376.5 $144.5 $8.0 $0.0 $86.0 $70.7 $15.3 $529.0 $493.0 $36.1 94.7% 93.2% 1975-1979 $529.0 $336.2 $9.5 $0.0 $174.5 $143.6 $30.8 $874.7 $829.1 $45.5 97.3% 94.8% 1980-1984 $874.7 $911.0 $16.3 $0.0 $452.6 $373.3 $79.4 $1,802.0 $1,740.2 $61.8 98.2% 96.6% 1985-1989 $1,802.0 $662.6 $32.2 $0.0 $902.8 $745.7 $157.1 $2,496.7 $2,402.7 $94.0 95.4% 96.2% 1990-1994 $2,496.7 $539.2 $29.8 $338.4 $1,064.5 $884.8 $183.9 $3,400.0 $3,263.7 $136.3 94.8% 96.0% 1995-1999 $3,400.0 $560.4 $19.4 $3,305.8 $1,564.8 $860.9 $178.4 $7,811.0 $7,501.7 $309.4 96.6% 96.0% 2000-2004 $7,811.0 $1,087.9 $11.7 -$1,475.5 $1,981.2 $1,028.4 $211.1 $8,177.0 $7,886.8 $290.2 98.9% 96.5% 2005-2009 $8,177.0 $2,027.5 $62.1 -$1,503.5 $2,134.3 $1,517.3 $307.4 $9,072.7 $8,759.9 $312.8 97.0% 96.6% 2010-2013 $9,072.7 $1,721.5 $54.8 $2,971.0 $1,242.2 $1,485.0 $297.1 $13,280.0 $12,828.7 $451.3 96.9% 96.6%



Severance Tax Permanent Fund ($ millions)

Fiscal Year FY Beginning

Market Value

Earnings Change in

market value

Contributions Distributions FY End Market Value

FY End Value Attrib to

OGAS

FY End Value Attrib to

Coal/Uranium

OGAS % this

period

OGAS % end of period

1970-1974 $0 $3 $2 $54 $0 $60 $58 $2 95.3% 96.4% 1975-1979 $60 $57 $75 $214 $26 $380 $350 $30 88.5% 92.1% 1980-1984 $380 $277 $93 $533 $277 $1,006 $896 $109 86.9% 89.1% 1985-1989 $1,006 $546 $252 $525 $546 $1,783 $1,578 $205 87.0% 88.5% 1990-1994 $1,783 $655 ($312) $509 $655 $1,980 $1,695 $285 81.5% 85.6% 1995-1999 $1,980 $672 $1,371 $393 $672 $3,744 $3,184 $560 81.5% 85.0% 2000-2004 $3,744 $616 ($156) $295 $789 $3,710 $3,169 $541 90.9% 85.4% 2005-2009 $3,710 $522 ($213) $218 $884 $3,353 $2,881 $472 95.8% 85.9% 2010-2013 $3,353 $136 $1,077 $39 $731 $3,873 $3,332 $542 95.4% 86.0%


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After 1913, proceeds from land which was sold on contract that extended the purchase over 30 years at a 5% annual interest rate were transferred to the permanent fund. The contract principal could be paid on a self-amortizing basis or a lump sum basis. The federal establishment designated some lands as $5 lands (per acre) and some as $3 lands. Grazing leases were priced roughly based on these designations, with the annual charge for grazing leases on land without water of $12.80 per section per year and $30 per section for land with water. A section is 640 acres. At statehood in 1912, virtually all of the 5,584809.03 acres granted to the Territory in the Ferguson Act had been selected. 2,072,000 acres were leased – primarily for ranching. About 75,000 acres had been sold outright or via contracts. The remainder of the original allotment was vacant. The Organic Act, also known locally as the Enabling Act transferred an additional 6,569,520 acres of federal land to the new State of New Mexico for the purpose of providing funds for public schools and higher education. The total of over 12 million acres is “but little smaller than the entire states of Maryland, New Jersey and Delaware”2

. By the end of 1914, all but 2 million of the 12 million acres total had been selected and title vested in the State. The Federal Government contested about 1 million acres of the 2 million unconfirmed. The 1910 grant gave sections 2 and 32 to the state, with about half of the new grants being already entailed or otherwise withdrawn, either as Indian reservations, federal forest reservations, residual Spanish or Mexican land grants, military reservations, patented mining claims, mineral and oil reservations, homesteads and patented lands, small holding claims, reservations for irrigation purposes and Indian allotments. Between the 1898 and 1910 grants, over 4,000,000 acres were lieu lands.

In the early going, the corpus of the LGPF consisted of 5% of the amount realized from sales of State land. In 1924, oil royalties began flowing to the LGPF. Somewhat later, mineral royalties (primarily from coal production on state lands) and timber sales were added to 100% of land sales and contracts and OGAS royalties. By State Law, all royalties and proceeds from the sale of State land are transferred to the LGPF. The FY2013 ending balance in the fund was $13,280,000,000. In building the General Fund interest model, we determined that the first flow of OGAS royalties to the permanent fund occurred in CY 19243, when the State Land Commissioner required all royalties on oil and gas, as well as hard mineral production on state production to be transferred to the permanent funds maintained on behalf of each of the institutions. By June 30, 1932, the book value of transfers to the permanent funds stood at $4,119,738, with the cumulative contribution from OGAS meaning that 36% of the contributions to the permanent funds from the beginning in 1900 were from OGAS royalties from production on State Lands and the remainder represented land sales, contracts and hard mineral royalties. By the end of FY 1962 (50th

2 State Land Commissioner’s 1914 Annual Report of the State Land Commissioner

fiscal year), contributions from OGAS has steadily increased in comparison to land sales and hard mineral royalties. At the end of the year, 91% of the LGPF could be reasonably attributed to OGAS. The table to the right exhibits this estimate of the history of the OGAS contribution to the LFPF through the decades.

3 In FY 1924, over $9,700 in oil royalties were collected. Only $1,611.71 of this total was transferred as State Land Commissioner Justiniano Baca determined that the royalties from depleting the oil and gas reserves should be treated differently than proceeds from grazing leases (sustainable) and similar to the sales of land. By 1925, 100% of land sales, hard mineral and oil and gas lease royalties were being transferred to the permanent funds.

Contributions Attributable to OGAS Land Grant Permanent Fund

Average

During Period At end of

period Pre-1963 62.4% 91%

1963-1972 94.4% 93% 1973-1982 97.1% 96% 1983-1992 95.9% 96% 1993-2002 95.9% 96% 2003-2012 97.5% 97%


– 10 –

The current LGPF interest model is not perfect. The various sources of information about OGAS and hard mineral royalties for production on State Lands cannot be perfectly reconciled. Part of the problem is that some early SLO data is expressed in calendar years and not fiscal years. Another part of the problem is that SLO has booked royalty revenue on an as-received basis while BOR, the Oil and Gas Accounting Commission (pre-1978) and the TRD have booked the revenue first on a distribution month basis, then on a receipt month basis and finally, after July 1, 2004 on an accrual basis which lags two months from the returns month. Over a long period of time, these differences don’t matter greatly (with the exception of the extra month of revenue recognized at the end of FY 2004), but matter significantly in trying to reconcile individual years. The STPF model was considerably easier to construct, since actual oil and gas severance and hard mineral severance data were available for the entire period from inception of the STPF in 1973 to date. The model, with a few uncertainties, indicates that OGAS percentage of the STPF is 86%. The uncertainty in this estimate is perhaps ±.5%, similar to the uncertainty in the LGPF General Fund Interest model. As for the LGPF model, this result is robust. As shown in the table to the right, for the most part, the average contribution ratio differed little from 86% for the first 20-years of the STPF. The contributions over the last decade have not influenced the aggregate estimate significantly since residual contributions from the STBF to the STPF have fallen with the advent of aggressive bonding programs where the state sells not only senior bonds, but subordinate bonds, and short-term “sponge bonds” of both senior and subordinate classes. This means that the earlier data is critical in determining the % of STPF interest attributable to oil and gas severance taxes. As shown in the table to the right, we assumed that for the period from inception in 1973 through 1994, approximately 45% of the total severance taxes were used for bonding and 55% transferred to the LGPF. The FY2013 ending market value of the LGPF is $3,873,169,911. Of the $176,172,684 transferred to the General Fund in FY 2013 from the LGPF, $151,508,508 is reasonably attributable to oil and natural gas production in the State. There is a minor defect of the model in that the portion of total severance taxes used to retire bonds is not directly available prior to 1994 when the Board of Finance bond disclosure documents have been available. During the period from 1973 through the late 1980s/early 1990s, only senior bonds were issued. These were, generally, five-year bonds with a two-to-one coverage ratio. Since there was always uncertainty in the amount of severance tax revenue available for semi-annual bonding, somewhat more than 50% of the severance tax stream was transferred in this period to the STPF. Board of Finance disclosure documents exhibit the details of the STBF for the period 1995 through 2012 by fiscal year. This affects in a minor way the timing of transfers to the STPF. Another minor defect is that these data do not directly reconcile with the data obtained from ONGARD for that period. It should be noted that the STBF records both oil and gas and hard mineral severance taxes when

Contributions Attributable to OGAS Severance Tax Permanent Fund

Average during decade At end of period

1972 -1983 87% 87% 1984-1993 86% 86% 1994-2003 84% 86% 2004-2013 94% 86%

Period

% of Severance taxes trans. To STPF

1972-73 100% 1973-74 75% 1975-1994 55% 1995- 2013* 22% Calculated from disclosure document, and ranging from 0% to 78%.



received. The State General Fund was converted to full accrual accounting at the end of FY 2004. This essentially means that production from May through April is reported to TRD (and paid) from July through June, but accrued to the General Fund based on the production months of May through April. This similar accrual conversion was not implemented for the STBF. This reconciliation problem is high on the list of issued for the next phase of this study.

General Fund Revenues: Gross Receipts and Compensating Taxes The inclusion of Gross Receipts and Compensating Tax is as unconventional as the inclusion of STPF and LGPF interest in calculating the percentage of the General Fund attributable to OGAS production in the state. Conventionally, only taxes imposed directly on and paid by the industry members are included in the calculation. However, although the New Mexico Gross Receipts Tax is a sales tax paid by the vendor or seller, the economic burden of the tax is borne by the buyer. This is a subtlety that is largely ignored in determining the contribution to the General Fund of any particular industry. It is not an insignificant burden, but is estimated as a total of $175,115,663 ($127,529,236 for the General Fund and $47,586,427 for counties and municipalities) for FY2013 for the three NAICS4

classifications listed in the following table.

In future versions of this report, we may include the economic burden of other purchases by oil and natural gas-related companies. We will use the IMPLAN model and tool to determine the plausible amount of taxable purchases of goods and services that are made by oil and gas industry members. The amount will be at least equal to the amount above and could be several times that amount. In FY 2013, oil, natural gas and CO2 total production value was $13.8 billion. This production is not directly taxed under the Gross Receipts Tax. However, if all this value were taxed, the total tax burden would be almost $1 billion. Consider the $175 million estimate above as a lower bound on the Gross Receipts Tax economic burden. Alternatively, as discussed previously, we may use an industry survey approach to refine and extend the phase 1 results. The Compensating Tax is a tax borne directly by the oil and gas producers and support companies. For example, a horizontal drilling rig purchased outside the State, but imported and used in drilling wells in New Mexico, is subject to the compensating tax of 5.125%.5

4 “NAICS” stands for North American Industrial Classification System. Economic reports in Canada, the United States and in Mexico are generated conforming to the NAICS classifications.

NMTRD’s Tax Policy and Research Office graciously provided the following data. In the future, TRD will resume the preparation and dissemination of the old RP-90 report of which these compensating tax data are an extract.

5 A heavy drilling rig may be eligible for a 50% deduction from compensating tax pursuant to § 7-9-77(A) NMSA 1978.

Gross Receipts Tax NAICS Categories 6-Digit NAICS Class Description

211110 Oil and Gas Extraction 213111 Drilling Oil and Gas Wells 213112 Support Activities for Oil and Gas Operations

Compensating Tax ($1,000) FY2009 FY2010 FY2011 FY2012 FY2013

Oil and Gas Extraction $2,000 $1,873 $2,255 $2,497 $3,251 Drilling Oil and Gas Wells $2,928 $1,067 $2,146 $2,071 $3,349 Support Activities for Oil and Gas Operations $4,959 $3,495 $10,288 $14,409 $13,124 Total OGAS-related $9,887 $ 6,434 $14,689 $18,977 $19,725

State Funds * $7,415 $4,826 $11,016 $14,233 $14,793



General Fund Revenues: Personal Income Tax Conventionally, when determining the portion of the General Fund attributable to taxes and royalties paid by the oil and natural gas industry, personal income taxes paid by employees or investors in production of the industry are not included. This is a similar argument to the traditional exclusion of the economic burden imposed on the industry of the Gross Receipts Tax. In that case, the argument advanced was that the tax is not imposed directly on the producers. That argument, however, fails in the case of Oil and Gas withholding. This is a tax collected by the producers from investors and persons with royalty interests in oil and gas production. These taxes, when deducted from royalty payments or profit distributions made to out-of-state investors are then remitted to the Department. At personal income tax time, these withholding payments are applied to personal income tax liabilities incurred by the payment of royalties by the producers. In the first few years following enactment in 2004, this was not a significant revenue source. However, in FY2013, producers remitted $90,195,333 to TRD on behalf of their royalty holders and investors. This is not a direct tax. The producers have a fiduciary responsibility to collect and remit this withholding. Nor is the amount of oil and gas withholding a perfect estimate of the amount of New Mexico tax liability incurred by the investors and royalty holders. On the other hand, it is likely that refunds will be modest, since the vast majority of investors are subject to the maximum 4.9% current income tax rate, which is the 2013 withholding rate. Thus, the allocated income from oil and gas interests will end up being taxed at approximately the 4.9% tax rate. This may be a specious argument, however. Total production on private lands in the state in FY 2013 was approximately $1.8 billion. If royalties are a usual 1/8th

, or 12.5% and the withholding tax rate is 4.9%, the total withheld and remitted to TRD should be around $11 million or less. Producers do have investors. Total production value for FY13, including production on State, Federal and private lands was $13.3 billion. If in addition to the $11 million in royalties on private lands, producers pay investors some portion of the profits from oil and gas production, $79 million in oil and gas withholding represents about $1.6 billion in profits subject to withholding. Thus, this is consistent with about 18% of production in New Mexico is financed by investors. This would imply, however, that there would be some depreciation deductions allowed against the withholding when tax returns were filed.

In addition to the oil and gas withholding amounts, the industry deducts and remits personal income taxes from wages and salaries of New Mexico residents. Once again, TRD’s Office of Tax Policy graciously provided an extract of the RP-90 which listed the withholding remitted to the Department based on the NAICS code of the remitter.

Local Governments $2,472 $1,609 $3,672 $4,744 $4,931 * General Fund portion is approximately 70% of this amount, 15% small cities, 10% small counties, ≈ 5% paid as comp to local Governments.

PIT Withholding ($1,000)



As can be seen in the following table, employers remitted slightly over $30 million in personal income tax withholding to TRD in the course of FY2103. Again, using this amount as a surrogate for actual PIT liability is appropriate. These are very well-paid jobs and it is likely that little of the amount withheld will be subject to refund. One effect previously noted is that roustabouts and field hands are somewhat casual about personal income taxes. They tend to move casually into and out of the state and let the amount of taxes withheld by their employers suffice instead of filing a New Mexico income tax return in the event that they are no longer resident in the state at the time of filing. These migrant workers cheerfully abandon any refund they might be due. For many reasons, then, it is appropriate that we give to the industry $90 million +$30 million in attribution to the General Fund for oil and gas withholding and for withholding from wages and salaries. Now, recognize that investors and royalty holders that are New Mexico residents or are regular corporations are not subject to the oil and gas withholding. We can only speculate on what portion of the royalty interests or profits distributed to investors show up on New Mexico personal income tax returns – either as direct income or as income reported from a pass-through entity such as a Subchapter S corporation, an LLC, a MLP or LLP or other partnership. In addition, resident fiduciaries and estates that have oil and gas income are subject to the personal income tax, which is reported as “fiduciary income tax.” So again, as is the case for Gross Receipts Tax, it is likely that the estimate included here is a lower bound of the impact of the oil and gas industry on General Fund revenues. All of these ideas will be explored further in phase 2. General Fund Revenues: Corporate Income Tax Some of New Mexico’s oil and gas producers are among the most profitable corporations in the world. These regular corporations are subject to the State’s Corporate Income Tax. In August 2012, TRD’s Office of Tax Policy and Analysis presented a comprehensive analysis of New Mexico’s Corporate Income Tax. The full report is included on the CD. For the five-year period of Tax Years 2006, 2007, 2008, 2009 and 2010, all mining, including oil and gas production, paid an average of 29.8% of all corporate income tax. For TY 2010, the August report indicates that 23.5% of gross CIT was paid by oil and gas and other mining. From a special extract provided by the TRD, the two categories “Oil and Gas Extraction” and 85% of “Support Activities for Mining” totaled 20% for TY 2010 and 14.1% for TY 2011. The August report also indicates that a number of oil and gas producers are reported in other categories. For the purpose of this estimate, we have added 3.5 percentage points to both TY2010 and TY2011 total of NAICS 211 and 85% of NAICS 213. This yields a consistent picture of the impact of the OGAS industry on the General Fund. Because of the uniformity of this analysis for the TY10 through TY12, we have assumed that the OGAS contribution to the General Fund for FY13 is $54,000,000. The linkage between Tax Year liability and Fiscal Year payments is quite complex and varies year by year. Beginning with estimated payments the same month that the previous year’s return is nominally due, followed by three more estimated payments over the next three quarters, followed by a tentative payment in March (or the third month after the end of the corporate fiscal year) and a final settlement six months later, tax year liabilities are spread over three fiscal years. For this reason, and the stability of the estimates in the table, we choose to report the stable tax year estimate rather than the more accurate fiscal year estimate.

FY2009 FY2010 FY2011 FY2012 FY2013 Oil and Gas Extraction $5,321 $4,938 $6,142 $5,554 $6,960

Drilling Oil and Gas Wells $3,549 $2,513 $3,343 $3,618 $4,206 Support Activities for Oil and Gas Operations $16,652 $12,975 $23,304 $19,269 $18,895

Total OGAS-related, $25,521 $20,426 $32,790 $28,441 $30,060



General Fund Revenues: Oil and Gas School Tax 100% of revenues from the Oil and Gas School Tax are transferred to the General Fund. Since the end of FY2004, the General Fund has adopted full accrual accounting. This means that revenues attributed to July, which are reported to TRD through the ONGARD system in September, are booked as July revenues. This is not entirely accurate since producers amend returns sometimes for years. The bulk of the volume and value data are stable on a sales-month basis after three or four months, but the data on processing and transportation deductions can take up to two years to become stable. It is the distribution month data that correlates quite closely with the revenue distribution ONGARD reports. Unfortunately, amendments are made in discontinuous fashion and cannot be used for revenue estimating. However, for this project, we are mostly interested in revenue, not revenue estimating. Therefore, we have downloaded and formatted all the ONGARD data on a distribution basis (to correlate between volume, value and deductions), and reported the data on an accrual basis of the sales month. The revenue report exhibits General Fund transfers, net of tax incentives (if any) and Indian dual tax credits. These dual tax credits represent payments from the producers to various Indian tribes (primarily the Ute Mountain tribe and the Jicarilla Apache tribe). 75% of the amount paid to the tribes result in a credit against school tax, conservation tax, severance tax and the ad valorem production tax. As part of this project, we have assembled volume, value, deductions and royalties data from various sources going far back in time to 1962, with data on royalties on hard mineral and OGAS production on State lands available back to 1924. These are listed in some detail in Appendix B. In the course of FY2013, the General Fund recorded Oil and Gas School Tax revenues of $384,969,999. The industry is credited with an additional $3,159,824 in payments to the various tribes. General Fund Revenues: Oil Conservation Tax The Oil Conservation Tax is somewhat more complex than the Oil and Gas School Tax. This is because there is a conservation tax imposed on coal that is processed outside the ONGARD system. A further slight complication is that the conservation tax rate is .24% of net value for oil, but only .19% for natural gas and CO2. A portion of the total proceeds of the conservation tax are distributed to the oil conservation fund. However, the data available from the Financial Control Division of DFA includes both oil and gas, as well as the coal conservation tax. Thus, for FY2013, oil and gas contributed $20,153,307 in conservation tax of a total

Corporate Income Tax by Tax Year Est. Gross CIT Est OGAS% AMT Pd by OGAS

TY06 $425,949,360 36.8% $156,749,365 TY07 $448,914,459 32.0% $143,652,627 TY08 $339,391,816 37.0% $125,574,972 TY09 $213,259,830 20.0% $42,651,966 TY10 $229,632,446 20.0% $52,432,970 TY11 $312,898,177 17.6% $55,005,430 TY12 $300,285,821 18.0% $54,051,448



$21,165,483 for the General Fund. An additional $4,710,619 was paid by the industry to the oil conservation fund. General Fund Revenues: Natural Gas Processors Tax 100% of the Natural Gas Processors Tax is transferred to the General Fund. While the calculation of the tax rate for this tax is somewhat complex, it is relatively simple to determine the total amount attributed to the OGAS industry. For FY2013, this was $24,196,501. General Fund Revenues: Federal Mineral Leasing Another somewhat complex revenue source is federal mineral leasing. Oil and Gas producers pay for the privilege of developing a particular OGAS site that is located on federal lands. After a well is in production, the producers pay royalties to the Minerals Management Service (MMS) based on a contractual percentage of production value. In most cases, the royalty percentage is 12.5%, or 1/8th

of the value of production. There is some controversy over whether the royalty calculation is based on market price less transportation and processing costs or whether the royalty rate is imposed on the gross wellhead price before deductions. This is a complex issue, but does not affect the calculation we are presenting in this report. The complexity is that oil and gas royalties and bonus payments are less than 100% of the base for calculation of revenue sharing. MMS also leases mineral lands and some grazing land. Based on ONGARD deductions and a download of the results of New Mexico bonus payments, the OGAS industry paid $849,174,257 in the course of FY2013 to the MMS for production on federal lands. Of this, an estimated $407,603,000 is the amount of the contribution of the oil and gas industry to the State General Fund. This includes federal lease bonus payments. The total collected by the State Treasurer and credited to the General Fund is $459,631,160, so that about $52 million represents royalties on other mineral production on federal lands.

General Fund Revenues: Land Office Income The State Land Office and the State Land Commissioner are charged with maximizing the income from land granted to the State at statehood in 1912. Until the late 1950s, the schools and institutions of higher education listed in the Constitution were operated largely on this income, supplemented by amounts collected through fines and forfeitures. In addition, the schools received a portion of local property taxes and money from the Emergency School Tax enacted in 1935. Now, all the royalties paid on oil and gas and other mineral production are actually deposited in the Land Grant Permanent Fund. The LGPF generates interest income which is booked as General Fund revenue, as previously discussed. However, the SLO also has a land maintenance fund, that is funded from grazing fees, leases not in the nature of royalties, interest, and, probably most importantly, bonus payments from oil and gas producers who bid on the right to drill and extract oil and natural gas from state lands. The SLO is self funding from the revenues collected in the land maintenance fund. Any excess over SLO budget in the land maintenance fund is distributed to the schools and Constitutional institutions. The portion transferred to the public schools is booked as General Fund revenue. Data are available on the SLO website as annual reports and historical data is available at the SLO offices in Santa Fe. In addition, an extensive history of the bonus payments made for the right to produce oil and gas is available on the SLO website. For FY2013, SLO revenue paid by the oil and gas producers was $30,349,730 of a total of $44,631,955 transferred to the General Fund. Proportion of the General Fund Attributable to Oil and Gas Production



When presented by DFA, the proportion of the General Fund attributable to oil and natural gas production is obtained by summing the receipts from emergency school tax, conservation tax, natural gas processor’s tax, State Land Office income and federal mineral leasing (FML). For FY2013, this calculation leads to the conclusion that oil and gas production in the state contributes 16.7% of General Fund revenues. This calculation overstates the percentage contribution on this basis because less than 100% of FML and SLO income is derived from oil and gas. In addition, a small amount of conservation tax is contributed by coal producers.

This project, in comparison, has calculated that the contribution of the oil and gas production industry in New Mexico is at least 31.5%, or almost twice the contribution as calculated by DFA. As shown in the table above, this project has validated inclusion of the gross receipts tax economic burden, compensating tax, PIT withholding and oil and gas withholding on non-residents and a high percentage of interest from the permanent funds as attributable to oil and gas production. As mentioned previously, this is probably a lower bound on the estimate of contribution of the industry. Oil and gas producers and suppliers purchase goods and services subject to the Gross Receipts Tax. The purchaser bears the economic burden of the tax, but not the legal burden in New Mexico. If the full amount of GRT reimbursed to suppliers were included, the GRT attribution would probably double from inclusion of just drilling, production and support services. Similarly, royalties and returns to investment in oil and gas production are subject to the personal (or corporate) income tax. There is no convenient means of estimating the amount of oil and gas production source income included in total personal income of resident investors or royalty holders. See the discussion earlier on plausible estimates of the origin of $90+ million in oil and gas withholding for FY 2013. Similarly, an unknown fraction of the corporate income tax is reported by oil and gas producers or suppliers in NAICS codes that make it difficult to provide an accurate estimate of the contribution of regular oil and gas producer or supplier corporations to the corporate income tax total. The $54 million estimated for FY 2013 in this project is then a probably lower bound.

General Fund Revenues Amount Attributable to OGAS Industry % of Gen Fund

Source Attributable Gross Receipts Tax $127,529,236 6.7% Compensating Tax $14,793,460 29.2% Personal Income Tax Withholding $30,060,426 2.8% OGAS Withholding (PIT) $90,195,333 100% Corporate Income Tax $54,000,000 20.5% Oil and Gas School Tax $384,969,999 100% 7% Conservation Tax $20,153,307 95.2% Natural Gas Processors $24,196,501 100% LGPF Income (Interest) $425,886,542 96.6% STPF Income (Interest) $151,508,508 86% Federal Mineral Leasing $407,603,643 84.7% State Land Office Income $30,349,730 68%

Total Attributable $1,761,246,685 31.5%



Severance Tax and Royalties – Contributions to the STBF, STPF and LGPF attributable to Oil and Gas Production In addition to the payment of Emergency School Tax and the Conservation Tax (both fully or partially General Fund sources), OGAS producers make other payments to State funds, including the STBF, the STPF and the LGPF. We have extensively discussed these payments that are included in the models for interest transfers to the State General Fund. We have finessed this a bit for the STBF and the STPF, although we have presented as accurate a picture of the LGPF as possible. The State Land Office is charged with managing almost 8,000,000 acres of State Lands for the benefit of the Common School Fund and the other Revenue Beneficiaries. Both revenue streams of interest to the General Fund have been discussed previously: General Fund – LGPF Interest and General Fund – SLO income. In FY 2013, OGAS interests paid a total of $494,082,929 in royalties for production on State Lands.6

We have also discussed the STBF and the STPF in previous sections of this report. There are two forms of Severance Tax. The “Severance Tax” is imposed at various rates on the production (severing) of hard minerals. The “Oil and Gas Severance Tax” is imposed on the production (severing) of crude oil, natural gas, carbon dioxide or helium from the ground. The basic rate of the Oil and Gas severance tax is 3.75% of wellhead value. Since both oil and gas are priced at some distance from the wellhead, the taxable value is usually the sales price at the remote market, less transportation costs, processing costs and federal or state royalties. There is no royalty deduction for production on private lands. These severance taxes are collected by TRD and transferred monthly to the Severance Tax Bonding Fund (STBF). From its creation in 1973, funds in the STBF were used to amortize bonds, called Severance Tax Bonds (STBs). The proceeds of the bonds were used for various state and local capital projects. Over the years, we have used the money sequestered in the STBF to make principal and interest payments on senior bonds, which have a two-for-one coverage ratio. In the wake of the Zuni School Capital law suit, the state began using “the other half” of the money sequestered in the STBF to purchase supplemental bonds, which are allocated by the Public School Capital Outlay Council (PSCOC) to fairly allocate school construction grants around the State. In some years, the legislature and the governor determine that it is appropriate to use up any unneeded funds in the STBF and make no transfer to the Severance Tax Permanent Fund. These short-term (frequently 24 hours in duration) bonds are called, in the vernacular, “sponge bonds”. In years past, we have sold regular, or senior sponge bonds and supplemental sponge bonds. Judging by the table on page six, the State has become quite aggressive in the utilization of the STBF stream. On net, we are transferring substantially more money to the General Fund as STPF interest than we are earning. Thus, we are eating our seed corn. In FY 2013, OGAS producers paid $399,482,155 in Oil and Gas Severance Taxes to the STBF. Mineral producers paid $19,232,667 in Severance Taxes to the STBF. These funds were fully consumed – through two semi-annual payments to amortize previously issued regular or supplemental bonds or were “sponged.” There was no FY 2013 transfer to the STPF.

All of this, plus an additional $11,402,299 in hard mineral royalties and $3,075 in land sales were deposited as contributions to the LGPF.

General Fund and Severance Tax Bonds – State and Local Capital Outlay Although Severance Tax bonds are frequently referred to as “PORK,” STBs (and occasionally direct appropriations of General Fund surpluses) are important sources of funding for state and local capital projects. STBs build schools, roads, buildings, support senior centers and projects in Indian Country. Over the years, several billion dollars in projects have been accomplished – either fully or partially funded by STBs. In FY 2007

6 Note: this is the amount reported by SLO. From ONGARD, the reported royalties for FY 2013 production year were $500,922,225. This difference will be diagnosed and reconciled in the next phase of this study.



and FY 2008, there was an oil and gas driven surplus in the General Fund. The following table details over a billion dollars in capital outlay funds allocated during the 2007 and 2008 legislative sessions.

GRAND TOTAL ($1,000) 2007 CAPITAL OUTLAY PROJECTS BY COUNTY Projects Amount Summary for County (including reauthorizations) 3,050 $721,609

General Fund 2,887 $488,382 STBs 156 $211,999 Other 7 $19,178 Reauthorizations 377 $0 Amount Attributable to Oil and Gas (STBs and GF) $527,563

2008 CAPITAL OUTLAY PROJECTS BY COUNTY Projects Amount Summary for County 1,777 $341,187

General Fund 1,434 $122,996 STBs 340 $215,491 Other Funds 3 $2,700 Amount Attributable to Oil and Gas (STBs and GF) 0 $241,615 Vetoes 187 $7,033

For these years, the proportion of the General Fund contributed by OGAS was assumed to be 30% (a low estimate) and of Severance Taxes, 95% (also a low estimate). For these two years, the total amount of capital outlay funds allocated was about $769 million of a total allocated of about $1,060 million. In the fall of 2008, oil and natural gas prices “tanked” – falling from almost $132 per barrel and $12.60 per Mcf for gas in July 2008 to $32.36 for oil in February 2009 and $3.46 for natural gas in April 2009. Since severance taxes are calculated as a percentage of value, plummeting prices also meant declining collections for severance taxes. The legislature enacted a very modest $139 million in STBs during the 2009 legislative session. The following table details the extraordinary actions taken by the State legislature and Governor to fix the problem.

GRAND TOTAL ($1,000) 2009 CAPITAL OUTLAY PROJECTS Projects Amount Summary for State 143 $139,960

STBs 143 $139,960 Amount Attributable to Oil and Gas (STBs and GF) $132,962

2009 SS CAPITAL OUTLAY SWAPS AND VOIDS Projects Amount Voids and reversions 236 $185,971 Voided GF funding swapped for STB funding 240 $144,697 New Project Added 1 $1,500 PSCO Funding Omitted 1 $31,600 Net Amount Attributable to Oil and Gas (STBs and GF) $81,671 Vetoes 45 $12,902

2010 2ND SS CAPITAL OUTLAY PROJECTS AND REAUTHS Projects Amount Summary for County 49 $42,150 STB funding 23 $41,800 Other Funding 1 $350



Reauthorizations 25 Amount Attributable to Oil and Gas -- STBs $38,760

2010 SS CAPITAL OUTLAY SWAPS AND VOIDS Projects Amount Voids and reversions 2,516 $177,457 General Fund 2,026 $123,111 STB 490 $54,346 Vetoes 74 $44,783 Voided GF funding swapped for STB funding 0 $5,679 STB 29 $5,679 Net Attributable to Oil and Gas Production -$83,167

Attributable to Oil and Gas Production Voids -$88,562 Attributable to Oil and Gas Production Swaps $5,395

2011 CAPITAL OUTLAY PROJECTS BY COUNTY Projects Amount Summary Reauthorizations by County 123 No new STBs were authorized

By 2012, oil and gas prices had somewhat recovered, although not to the levels of 2008. Beginning in 2008, however, producers and support companies began investing in horizontal drilling rigs and learning how to “frack.” Oil volumes have now recovered to levels not seen since the mid 1970s.7 There has been a corresponding recovery of severance taxes and the bonding program these bonds support, although not to the levels previously seen. This is at least in part due to fact that the Water Trust fund receives 10% of senior STB capacity8, while the Tribal Infrastructure Trust Fund receives 5% of the senior STB capacity each year.9

GRAND TOTAL ($1,000)

2012 CAPITAL OUTLAY PROJECTS Projects Amount Summary for County 484 $137,318

STBs 280 $107,514 Other Funds 7 $6,898

7 Of some slight interest, NMIMT provided data from the old Oil and Gas Accounting Commission that indicated that the peak of oil production in New Mexico was 1969 (Calendar year), when producers extracted and sold 128 million barrels. In FY 2013, in comparison, producers extracted and sold 98 million barrels. The low point in crude oil production was FY 2007, when producers extracted and sold 56,737,000 barrels. 8 http://uttoncenter.unm.edu/pdfs/water-matters-2014/28-water-trust-board.pdf for more information on the Water Cabinet and the Water Trust Fund. 9 From http://www.iad.state.nm.us/docs/funding/FY2014%20TIF%20NOFA%20101513.pdf. “TRIBAL INFRASTRUCTURE ACT: The Tribal Infrastructure Act, signed into law in 2005, recognizes that many of New Mexico’s tribal communities lack basic tribal infrastructure, including but not limited to water and wastewater systems, roads, and electrical power lines, and that the lack of such infrastructure results in poor social, health, and economic conditions in such communities. The Act created the Tribal Infrastructure Trust Fund and the Tribal Infrastructure Project Fund and also created a thirteen-person Tribal Infrastructure Board. The purpose of the Board is to evaluate project proposals and to award grants and loans to qualified projects from money available in the Tribal Infrastructure Project Fund. --- Pursuant to the Laws of 2010, HB162, Severance Bonds for Tribal Infrastructure, the board of finance shall allocate five percent (5%) of the estimated senior severance tax bonding capacity each year for tribal infrastructure projects, and the state board of finance will issue severance tax bonds in the annually allocated amount for use by the Tribal Infrastructure Board to fund qualified tribal infrastructure projects.”

http://uttoncenter.unm.edu/pdfs/water-matters-2014/28-water-trust-board.pdf�http://www.iad.state.nm.us/docs/funding/FY2014%20TIF%20NOFA%20101513.pdf�



Reauthorizations 3 $0 Amount Attributable to Oil and Gas Production $102,138 Vetoes 194 $22,906

2013 CAPITAL OUTLAY PROJECTS Projects Amount Summary for County 785 $269,340

STBs 769 $218,132 Other Funds 16 $51,208 Amount Attributable to Oil and Gas Production 0 $207,225 Vetoes 72 $4,402

Despite the tumult in the U.S. economy from 2007, with an oil boom and bust, the banking crisis, the Great Recession and slow recovery, oil and gas production has sustained the state. This can be clearly seen in the capital outlay table that follows. For the period from FY07 through FY13, the legislature and Governor provided a total of $1,449,094,000 in capital outlay, for an average of $240 million per year. Of that total investment in capital projects, the oil and gas production industry in New Mexico, through oil and gas severance taxes, emergency school tax and conservation tax payments, as well as the other payments made by the industry to contribute to the General Fund provided $1,248,767,000, or over $200 million per year. For the 2013 fiscal year, a total of $218,132,000 in capital projects were approved, of which $207,225,000 was attributed to severance taxes paid by the OGAS industry. In addition, approximately $21 million was added to the Water Trust Fund and $10 million to the Tribal Infrastructure Trust Fund. 95% of these latter amounts were attributed to oil and gas.

Capital Outlay -- Severance Tax Bond Activity ($1,000) FY 2013 STBs 769 $218,132

Amount Attributable to Oil and Gas Production $207,225 FY07 through FY13 -- 7-Year Summary $1,449,094

General Fund 2,059 $302,297 STBs 2,471 $1,146,797 Amount Attributable to Oil and Gas Production $1,248,767

Allocation of 31.5% of Public School Funding Formula to the Counties This study has estimated a lower bound on the contribution of OGAS to the State General Fund of 31.5%. By inference, that means that all of the activities and funding of the State that receives General Fund support can be considered to be funded to that extent by oil and gas production in the State. It has often been said that if you live in New Mexico, you are implicitly in the oil business. Thus, OGAS can “take credit for” 31.5% of the State Equalization Guarantee (SEG) that pays for K-12 public school education. OGAS can take credit for 31.5% of higher education funding, 31.5% of Medicaid, 31.5% of State Police and Public Safety, 31.5% of General Government, 31.5% of the State portion of Medicaid and other income support and 31.5% of the activities of the Economic Development Department, Tourism Department, Department of Cultural Affairs and the Department of Health. In dollar terms, OGAS can reasonably take credit for almost $1.8 billion dollars in General Fund appropriations.



Some of this General Fund spending directly affects activities at the county level. Probably the most important appropriations are those that keep the public schools and charter schools operating. Total SEG for FY2013 was $2,267,376,553, with $714,223,614 attributed through the 31.5% to OGAS. With ease, these amounts can be assigned to the 89 school districts. With a little creativity and blind luck, these amounts can be aggregated from the school districts to the Counties. For about half the districts, all of the land area and all of the students are completely within one County. For the other half of the districts, a rough assignment of school districts to counties can be done by determining relative land area. The two maps on the following page were used to do this. There is an alternative procedure that could have been used. That would have been to obtain data from DFA/LGD on residential property tax valuation by school district. Each school district in the state makes separate decisions regarding operating and debt levies. The rate sheets can be easily manipulated so that allocation of districts to Counties could be done on the basis of relative valuations of split districts into the various Counties. This procedure will be adopted for the next phase. Unfortunately, the value of property may be inversely correlated with the location of students. And adjacent counties may have quite different sales-assessment ratios. For this phase, then, the disadvantages of the proposed property tax valuation method far exceeded the simplicity and relative accuracy of the relative land area method. And, in truth, the accurate determination of overall support of OGAS of the statewide education establishment is the more important determination.

A word or two concerning public finance in this area may be useful. At statehood, public schools, universities, higher education institutions, a reformatory, an insane asylum, Rio Grande improvements, the blind school and the deaf school were granted federal lands. The State Land Commissioner has and will administer this land on behalf of the beneficiaries. In addition to current income from grazing fees and the like, bonus payments, business leases there is the interest income from the Land Grant Permanent Fund. Fines and forfeitures also are allocated to the Common School Fund. In the early 1930’s, property taxes and income from the land grants



were not sufficient to keep the schools operating. By 1936, after a series of missteps10, the State enacted an emergency school tax modeled after Mississippi’s 1932 sales tax.11

The sales tax had been modeled after general excise taxes that had been used in Europe since the middle ages. The proceeds of the new Emergency School Tax kept the schools open. By 1958, the entire state level of school support was rolled into the General Fund. Yes, the State Land Office continued to generate income for the schools and other institutions, but more support was needed. The emergency school tax (imposed at the time on both oil and gas production, hard mineral production, construction and all other goods and services) became a General Fund source and no longer earmarked for education. In the late 1960s, the emergency school tax on goods and services became the gross receipts and compensating tax act. By 1982, “Big Mac” got the state out of property tax for operating costs and assigned the state’s portion of the 20 mill constitutional limit on property taxes for operating to the counties, cities and school districts – 11.85 mills for the Counties, 7.65 mills for the municipalities and .5 mills for the schools. In addition, the State, the Counties, the municipalities, the schools and a number of special districts could impose debt with approval of the voters. Throughout these successive changes in the nature of public school financing, the State Land Office continued to manage state lands on behalf of the beneficiaries and distribute income and interest to the schools and other Constitutional institutions. However, in 2013, the SEG totaled $2,267 billion, while SLO income and LGPF interest plus fines and forfeitures and Federal Mineral Leasing totaled was $951 million, or 42% of need.

Public School Finance Perm. Fund Income * $440.9 Land Office Income * $44.6 Federal Mineral Leasing * $459.6 Fines & Forfeitures * $5.7

Total Dedicated School Funding $950.8 FY 2013 SEG $2,267.4 Portion of the SEG contributed by dedicated sources 42% Gross Receipts Tax $1,912.7 Oil & Gas School Tax $385.0 Total all current and historical dedicated sources $3,248.5

The detailed allocations of the SEG to Counties are reported in the companion County Allocation portion of this report. Allocation of 31.5% of Higher Ed Formula to the Constitutional Institutions by County In the same way that the OGAS industry can reasonably take credit for 31.5% of the SEG, it can also take credit for the money that goes to the universities and named Constitutional institutions. The FY2013 total is over $723 million, of which, OGAS contributed 31.5%. or nearly $228 million.

10 New Mexico’s Sales Taxation of Services -- A Plausible Ontogeny. New Mexico Taxation and Revenue Department, (1996) tells the story of how New Mexico expanded the new sales tax idea to taxing services and construction, as well as goods. Often, when asked how other states could add services to their sales tax bases, the author answers – go back and ask for a do-over in the 1930s. 11 http://bobmannblog.com/2013/04/15/a-thrilling-mississippi-sales-tax-saga/ provides a lively account of the factors leading up to Mississippi’s 1932 foray into regressive sales taxation.

http://bobmannblog.com/2013/04/15/a-thrilling-mississippi-sales-tax-saga/�



FY 2013 Higher Ed Funding Higher Ed Funding

Attrib. to OGAS UNIVERSITY OF NEW MEXICO $284,966

UNM Albuquerque Main Campus $180,996 $57,014 Albuquerque UNMH $85,414 $26,905 UNM Gallup Branch $8,704 $2,742 UNM Los Alamos Branch $1,784 $562 UNM Valencia Branch $5,032 $1,585 UNM Taos Branch $3,037 $957

NEW MEXICO STATE UNIVERSITY $186,431 NMSU Las Cruces -- Main Campus $151,715 $47,790 NMSU Alamogordo Branch $7,043 $2,219 NMSU Carlsbad Branch $4,410 $1,389 NMSU Dona Ana Branch $19,827 $6,245 NMSU Grants Branch $3,436 $1,082

NEW MEXICO HIGHLANDS UNIVERSITY $29,160 NMHU Las Vegas Main Campus $29,160 $9,185 NMHU Rio Rancho Campus $0 $0

WESTERN NEW MEXICO UNIVERSITY $17,555 WNMU Silver City - Main Campus $17,555 $5,530

EASTERN NEW MEXICO UNIVERSITY $42,007 ENMU Hobbs -- Main Campus $28,521 $8,984 ENMU Roswell Branch $11,428 $3,600 ENMU uidoso Branch $2,059 $648

NEW MEXICO INSTITUTE OF MINING & TECHN $35,246 NMIMT Socorro $35,246 $11,102 NMIMT Lea County satellite $0 $0

NORTHERN NEW MEXICO COLLEGE $10,526 NNMC El Rito Campus $2,000 $630 NNMC Espanola Campus $8,526 $2,686

SANTA FE COMMUNITY COLLEGE $12,501 SFCC Santa Fe Campus $12,501 $3,938

CENTRAL NM COMMUNITY COLLEGE $47,750 CNMCC Albuquerque - Main campus & Satellites $47,750 $15,041 CNMCC Rio Rancho Campus $0

LUNA COMMUNITY COLLEGE $7,762 Luna Community College $7,762 $2,445

MESALANDS COMMUNITY COLLEGE $4,290 $1,351



FY 2013 Higher Ed Funding Higher Ed Funding

Attrib. to OGAS NEW MEXICO JUNIOR COLLEGE $6,215

New Mexico Junior College $6,215 $1,958 SAN JUAN COLLEGE $23,199 $7,308 CLOVIS COMMUNITY COLLEGE $8,751

Clovis $8,751 $2,757 NEW MEXICO MILITARY INSTITUTE $2,066

NMMI Roswell $2,066 $651 NM SCHOOL FOR BLIND & VISUALLY IMPAIRED $975

NMSBVI Alamogordo $975 $307 NM SCHOOL FOR THE DEAF $3,768

NMSD Santa Fe $3,768 $1,187 $723,168 $227,798

Two small notes are required. The State’s Universities and colleges are permitted to have main campuses, branch campuses (with the approval of the State Board of Finance and the Legislature) and satellites. Main campuses and branch campuses are funded in HB-2 each year. However, satellite campuses and operations are not separately budgeted. Therefore, operational funding for the satellites is internally budgeted within the university or college. The authors of this study did not have access to these operating budget data which would have been required to allocate the funding to a satellite in a different county. There were several examples of this including NMHU’s satellite in Rio Rancho and Luna Community College’s operations in Mora and Guadalupe Counties. County Data – General Fund and Severance Tax Bonds Allocated to Counties Every year, after the legislative session, the Legislative Council Service publishes Highlights of the xxxx Session. These Highlight documents become a permanent record of each session’s actions. In particular, Table 10 list the Severance Tax and General Fund Capital Outlay actions by County. Although it was very messy technically to convert the .pdf Highlights to Excel format, the authors persisted and were able to allocate all of the capital outlay approvals and appropriations from FY 2007 to FY 2013 by County. The swaps and reversions done in the 2009 and 2010 Special Sessions were particularly troublesome. The details of these allocations are also included in the companion County Impacts document. What this Study Accomplished?

1) Built model quantifying the proportion of the LGPF interest attributable to OGAS with accuracy of ±.5%.

2) Built model quantifying the proportion of the STPF interest attributable to OGAS with accuracy of ±1%. 3) Included some of the economic burden of the Gross Receipts Tax in the calculation of the share of the

General Fund attributable to OGAS. 4) Included Oil and Gas Withholding and direct PIT withholding on certain categories of wages and

salaries for inclusion in determining the proper portion of the General Fund to attribute to OGAS.



5) Properly calculated the FML royalty share, including bonus payments, to attribute these federal revenue shares to OGAS.

6) Properly calculated the share of SLO revenues in the General Fund to OGAS bonus payments. 7) Extended the calculation of proportion of the General Fund attributable to oil and natural gas

production (31.5% in this study) to allocate Public School Support to School Districts and aggregating the 89 school districts impacts to Counties.

8) Extended the calculation of proportion of the General Fund attributable to oil and natural gas production (31.5% in this study) to allocate Higher Ed funding formula to the Constitutional Institutions.

9) Allocated Capital Outlay to the Counties at an aggregate level, assuming 95% of the contributions to the STBF are attributable to oil and gas production.

10) Provided a current data point on the importance of oil and gas production to non-OGAS producing counties through the Public School Funding Formula and the annual Capital Outlay (Severance Tax Bond Fund) appropriations.

11) Assembled and organized a great deal of old, even antique data, and rendered this data into organized databases.

What investigations remain for Phases Two and Three?

1) Improve the LGPF interest model by completing the transcription of early data from State Treasurer’s reports and reports of the State Land Commissioner. Of particular utility would be to record the split between the common school fund and the other Constitutional institution.

2) Reconcile the LGPF disclosure documents with ONGARD data. 3) Reconcile the SLO annual reports with other data sources. 4) Improve the STPF interest model by determining the percentage of contributions to the STBF that were

used for bond payments and the percentage transferred to the STPF. 5) Work with TRD and DFA to extract net PIT liability when returns show credits from Oil and Gas

Withholding. In addition, determine if there are any data that would allow calculation of net PIT from employees of companies within the industry.

6) Work with TRD, refine the true total of Compensating Tax, Corporate Income Tax, Gross Receipts Tax and Personal Income Tax Withholding to account for the fact that some members of the industry – particularly in Support Services do not report using the proper, attributable NAICS code.

7) Work with TRD, allocate PIT withholding and final liability of OGAS employees to Counties. 8) Unravel the mystery of too much money for oil and gas withholding, or at least confirm the speculation

that the bulk of oil and gas withholding is attributed to payments to investors and not to royalties. Determine if the entire amount of withholding show up as liabilities.

9) Consider investigating the cost structure of the industry through survey under NMOGA’s auspices. This would provide direct evidence, supplemented by IMPLAN and RIMS II coefficients, of the amount of economic burden borne by the industry in addition to the burden of gross receipts tax on Oil and Gas Extraction, Oil and Gas Drilling and Oil and Gas Support Services.

10) Include Water Trust Fund grants and Tribal Infrastructure grants and projects in the capital outlay by county tables. Consider separate tables for Jicarilla and Navajo nations.

11) Reconcile Sales month detail and Distribution month summaries with the ONGARD revenue report and determine why the data are not exactly congruent. Is this because some of the gas plant products are reported in different counties than the county in which the gas was extracted?



Appendix A: Matrix of Tax and Royalty Payments from Oil and Gas Producers to the General Fund and other Entities

FY 2013 General

Fund Amount ($ millions)

Amounts Paid by Industry to State and Local Gov'ts

Approx. % OGAS

State General Fund

($ million)

Land Grant Permanent Fund

($ million)

Severance Tax Bond Fund ($ million)

Other State Funds

Counties & Municipalities

Gross Receipts Tax $1,912.7 $175.1 6.7% $127.5 $47.6 Compensating Tax $50.7 $19.7 29.2% $14.8 $4.9 Gross PIT Withholding (CRS) $1,071.4 $30.1 2.8% $30.1 PIT TAA - Oil & Gas Withholding $90.2 $90.2 100.0% $90.2 Net Personal Income $1,225.7 $120.3 9.8% $120.3 Corporate Income Tax $263.0 $54.0 20.5% $54.0 Oil & Gas School Tax (see Note: below) $385.0 $385.0 100.0% $385.0 7% Oil Conservation $21.2 $24.9 95.2% $20.2 $4.7 Natural Gas Processors $24.2 $24.2 100.0% $24.2 Perm. Fund Income * $440.9 $425.9 96.6% $425.9 Sev Tax Income Fund $176.2 $151.5 86.0% $151.5 Federal Mineral Leasing * $459.6 $407.6 88.7% $407.6 Land Office Inc. * $44.6 $30.3 68.0% $30.3 Recurring General Fund/Total $5,590.2 31.5% $1,761.2 31.5% Non-General Fund Sources

Severance Taxes -- Total $420.0 $1,761.2 $420.0 Royalties $500.9 $500.9 Ad Valorem Production Tax $126.4 $6.3 $120.1 Ad Valorem Equipment Tax $79.8 $4.0 $75.8

Column Totals $5,590.2 $2,945.6 $1,761.2 $500.9 $420.0 $15.0 $248.4 SEG & Charter Schools Allocation $2,090.8 $658.6 $658.6 Higher Education Distribution $757.7 $237.9 $237.9

Note: * -- the table does not show amounts paid to Indian tribes, nations or pueblos representing Indian dual tax credits -- primarily Navajo and Jicarilla. The dual tax credits are in lieu of the named emergency school tax, conservation tax, severance tax and ad valorem production taxes. There is also a small amount of gross receipts tax paid to tribes in the three oil and gas-related categories.



Appendix B: Comprehensive Listing of Data Sources and Uses Description of Data Set Periodicity Start/End Data Data Source File Name Revenue Notes:

TRD Master ONGARD – Distribution month ONGARD – Sales month detail ONGARD – Revenues ONGARD – Tax Incentives ONGARD – Indian Dual Tax Credits ONGARD – Advanced Payments



Appendix C – Statutory History of Mineral Severance Taxes in New Mexico Note: the bulk of these history tables were last update in 2001, when the PI was Chief Economist for TRD. Please contact the PI or NMTRI to ask that these tables be updated in the future editions of this report.

Fiscal Year OGAS Severance Tax School Tax Conservation

Tax Ad Valorem Production

Ad Valorem Equipment NGPT

1935-1936 2% .125% 1937-1949 2% 2% 1949-1955 2.5% 2% 1956-1959 .14%

1959 Oil and gas severance tax separated from the severance tax and imposed at a rate of 2.5%. School Tax Separated from new Gross Receipts Tax 1960-1963 2.5% 2% .14%

1964-1970 2.5% 2.55% .14% .45% on all mfg. products

1971-1974 2.5% 2.55% .14% .45% on gas plants

1973 Oil and gas severance tax removed from general fund, allowed for capital assets bonding (50%) with residue deposited in new Oil and Gas Severance Tax Permanent Fund.

1975-1987 3.75% 2.55% .18% .45% on gas plants

1978-1982 3.75% 2.55% .18%/.19% .45% on gas plants 1977-1987 Oil and gas severance tax rates adjusted, but approximated 3.75%

1982-1993 3.75% 3.15% .45% on gas plants

1994-1998 3.75% 4.00% on gas .45% on gas plants

1999-2013 3.75% 4.00% on gas

65¢ per MMBTU, gas

plants only; adj. annually

Year Oil and Gas Conservation Tax Action

1935 Oil and gas conservation tax imposed at a rate of .125% on the proceeds of oil and gas produced in the State, less federal, state and Indian royalties. (Indian royalties were deductible by the taxpayer, but taxes on these royalties were remitted by the USGS until 1978). Reported and collected "at the same time and in the same manner" as the Emergency School Tax. Tax earmarked for support of Oil Conservation Department.

1955 Rate raised to .14%. 1975 Rate raised to .18% and tax made applicable to coal (sales value less federal, state and Indian

royalties) and a portion of the value of uranium. Tax earmarked for support of the Energy Resources Board (subsequently, Energy and Minerals Department).

1977 Allocation of 7% of receipts to General Fund (previously, this allocation was accomplished through the general appropriations act). Rate increased to .19%, with allocation of additional .01% to the Oil Reclamation Fund, except the rate is reduced to .18% if the balance in the Fund exceeds $1 million.

Year Natural Gas Processors Tax



Year Natural Gas Processors Tax 1963 Oil and gas manufacturers privilege tax imposed at the rate of .45% of the value of products (oil,

natural gas and liquid hydrocarbons) which have been refined or processed by manufacturers. Certain deductions allowed. Collected by the Oil and Gas Accounting Commission, 25 days following end of sales month. Allocated to the General Fund.

1970 Tax base changed to apply only to products of natural gas processing plants. 1998 This tax is totally revamped with the imposition shifted to processing plants from producers. Tax will be

measured by the MMBTUs of natural gas at the plant inlet. The rate is set initially at .65¢ per MMBTU but will be adjusted every July 1. The adjustment factor is equal to the average value of natural gas produced in New Mexico the preceding calendar year divided by $1.33. The initial rate for the six-month period January 1, 1999 through July 1, 1999 will be similarly adjusted. New deductions are added for gas legally flared or lost through plant malfunction.

Year Oil and Gas School Tax

1959 Oil and gas severance removed from under the "E

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