Oil-producing states benefit from war-driven windfall

There are all sorts of reasons that geopolitical conflict in the Middle East is bad for the global economy. However, there may be a silver lining for some U.S. states: Higher oil prices from the war are boosting tax revenue for oil-producers like Alaska and New Mexico.

To be clear, it can be hard for governments to predict tax revenue.

“Unfortunately, it’s very hard for revenue forecasters to forecast revenues with any precision,” said Lucy Dadayan, a principal research associate with the Tax Policy Center.

That’s especially true for states that rely on taxes from oil production, like Alaska, North Dakota, “New Mexico, Texas, Oklahoma, Louisiana, West Virginia, and to some extent Montana,” Dadayan said.

John Diamond, senior fellow in public policy at Rice University’s Baker Institute, said these taxes are “a volatile source of state funds.”

He said that when the price of oil is high — like it is now — states collect more of what are called severance taxes.

“As we've hit this war where oil prices have spiked … that's going to drive severance tax revenues way up,” Diamond said.

That’s temporarily good news for oil-producing states that are seeing increased revenue projections right now. However, Jared Walczak, a senior fellow with the Tax Foundation, said the gravy train only lasts so long.

“States want to hedge against an overreliance on it,” Walczak said. “You don't want to fund your education budget, 10% of that, on this, and then suddenly it's not there.”

In New Mexico, the legislature has recently capped how much of the state’s general fund comes from oil and gas.

“For most of my career, we would look at this windfall, and the legislature would say, ‘Well, how do we spend all of it?’” said Charles Sallee, director of New Mexico’s Legislative Finance Committee. “And today, the legislature saying, ‘How do we make the best use of it?’”

That means that any additional revenue New Mexico gets from a higher-than-expected oil price “will essentially go into our our permanent funds,” Sallee said.

They won’t spend that extra money today but use it to smooth out boom-and-bust cycles in the future.