What’s the Severance Tax Permanent Fund For?

Yesterday, the Santa Fe New Mexican’s Bruce Krasnow examined “From Volatile Severance Taxes to Sustained Revenue,” a Pew Charitable Trusts analysis of how states use the revenue they derive from levies placed on natural resources. The reporter dutifully traced the history of the Land of Enchantment’s Severance Tax Permanent Fund (STPF), writing that it “was created by the Legislature in 1973 and given constitutional protection by voters three years later. Money from it is used to pay off capital construction projects around the state known as severance tax bond projects. Money is also transferred every year to the state general fund, which pays for the day-to-day operations of state government, from courts to public education.”

As Pew’s researchers noted, the STPF’s purpose is “implied and broad” rather than “explicit and narrow.” And unlike similar accounts in Alaska, Wyoming, and West Virginia, legislators are permitted to withdraw from the fund’s principal.

The report should be required reading for lawmakers and candidates for the legislature. A look at how other states handle severance-tax revenues is valuable, and a discussion on how the STPF serves New Mexico taxpayers is overdue. But beyond technicalities, the fund’s very existence should be debated.

All taxes on “natural resources” are predicated on the notion that revenue from non-renewable commodities should be “invested” for “future generations.” The justification has a superficial appeal, but it suffers from a fundamental misunderstanding — one well-articulated by the Institute for Energy Research’s Robert L. Bradley Jr.: “What are resources today may not be tomorrow, and vice versa.”

Economist Erich Zimmermann wrote that resources “are highly dynamic functional concepts; they are not, they become, they evolve out of the triune interaction of nature, man, and culture, in which nature sets outer limits, but man and culture are largely responsible for the portion of physical totality that is made available for human use.” (Petroleum offers an excellent example. Technological advancements enable drillers to return to “played out” wells for another crack at extracting black gold.)

New Mexico faces an almost existential crisis. It is losing population, its economy is arguably the worst in the nation, and it may not be able to meet meet its long-term unfunded liabilities. Perhaps the best way the STPF — along with its sister account, the far bigger Land Grant Permanent Fund — can serve the state’s future is to go away. Spending down the funds over a decade would enable the state to eliminate its taxes on personal and corporate income. Real economic-development policies would go a long way toward ensuring that New Mexico actually has a future.