Oil price shocks and New Mexico tax revenue

Oil and gas extraction is by far the most important fossil fuel industry in New Mexico, accounting for 15% to 20% of state revenue in recent years. The volatile nature of oil and gas prices affect the revenue stream associated with the oil and gas severance tax and production taxes, but what effect does this volatility have on secondary revenue sources associated with oil and gas, such as the gross receipts tax, the personal income tax, and the corporate income tax? This study introduces a different approach to state revenue forecasting that utilizes an adapted form of the Hamilton model. The Hamilton model is a quarterly model commonly used at the national level to predict the effects of higher oil prices on real GDP growth. This study adapts the Hamilton model to predict the effects of higher annual level oil prices on annual state personal income in New Mexico. A time series of 1975 to 2012 is analyzed and the predicted annual state personal income values are then used to forecast taxes associated with personal income.;The study found that there is a positive, short term relationship between personal income and oil price shocks in New Mexico. The study also found that this relationship has a positive effect on state tax revenue sources that are a function of state personal income. Out of sample forecasts revealed that the model forecasts both gross receipts tax revenue and personal income tax revenue with precision.