States brace for Trump’s push to make oil drilling cheap again

Royalty Rate Rollback Threatens New Mexico’s Public Funding Windfall

A Republican-led initiative to reduce drilling costs on federal land is creating significant fiscal challenges for states that rely on oil and gas revenue, with New Mexico facing the most severe impact as it expands early childhood education programs and builds savings for future generations.

The change stems from legislation signed by President Donald Trump in July that reduced the federal royalty rate from 16.7% to 12.5% – returning it to the rate that had been in place for a century under the 1920 Mineral Leasing Act before the Biden administration’s increase in 2022.

Trump and congressional Republicans argue the rate reduction will stimulate energy production, create jobs, and improve affordability as the administration moves to expand drilling and mining operations on public lands. However, the reduction comes with significant financial implications for states that receive nearly half of the money collected through federal royalties.

The environmental and economics research organization Resources for the Future estimates the rate change will reduce federal royalty collections by approximately $6 billion over the next decade. New Mexico, as the largest recipient of federal mineral lease payments, stands to lose the most – potentially forgoing $1.7 billion by 2035 and up to $5.1 billion by 2050, according to calculations by economist Brian Prest.

“New Mexico’s impact is way bigger than Wyoming or Colorado or North Dakota,” Prest noted, “and that’s just because that’s where the action is on new development.”

The state’s vulnerability is compounded by its heavy dependence on the oil and gas industry, which contributes more than one-third of its general fund budget. While the effects will materialize gradually – federal leases allow a 10-year window to begin drilling and production – state officials are already preparing for leaner times ahead.

“It all hurts when you’re losing revenues,” said Democratic state Sen. George Muñoz of Gallup. He added that lawmakers still hope to invest in mental health care and support Medicaid, despite the projected decline in federal royalty payments. “We’ve learned that until the chicken’s got feathers, we’re not even looking at it.”

New Mexico has experienced a nearly five-fold surge in local oil production since 2017, creating a financial windfall that has funded teacher salary increases, tuition-free college education, universal free school meals, and other public services. Anticipating potential future volatility in oil markets, the state has prudently set aside billions of dollars in investment trusts, including a dedicated fund for early childhood education aimed at expanding preschool access, child care subsidies, and home wellness visits for pregnancies and infants.

These savings have grown to $64 billion, second only to Alaska’s Permanent Fund, making investment earnings the state’s second-largest source of general fund revenue. This financial security enabled New Mexico to respond decisively to this year’s federal government shutdown by subsidizing the state’s Affordable Care Act exchange, covering food assistance, and offsetting cuts to public broadcasting.

However, warning signs are emerging. Last week, lawmakers reviewing state finances learned that predictable income contracted by 1.6% – the first such decline since the COVID-19 pandemic began. Sen. Muñoz noted the situation could be worse if New Mexico had not proactively raised its own royalty rates from 20% to 25% for new leases on prime oil and gas tracts while ending a sales moratorium earlier this year.

The economic slowdown has cast doubt over Governor Michelle Lujan Grisham’s recently launched universal free child care initiative. Some fellow Democrats in the legislature have expressed concern about the proposed $160 million spending increase. State Rep. Meredith Dixon of Albuquerque pointed out that hundreds of families earning more than $320,000 annually could qualify for free child care despite not needing assistance.

“Universal child care is a fantastic idea,” Dixon said. “I 100% don’t agree with this approach.”

Lawmakers also face a court mandate to implement a remedial plan to improve K-12 education for Native American students and others from low-income households. New Mexico has consistently ranked near the bottom nationally in education outcomes, with persistently low test scores and graduation rates.

After New Mexico, the states receiving the most federal oil and gas royalties are Wyoming, Louisiana, North Dakota, and Texas. While Texas is the nation’s top oil producer and shares the prolific Permian Basin with New Mexico, it has far less federal land and therefore less exposure to changes in royalty policy.

In Alaska, state officials view the royalty reduction more positively, seeing potential for increased development in areas like the National Petroleum Reserve-Alaska, where the Willow project approved in 2023 could catalyze further activity. The reserve is expected to hold its first lease sales since 2019.

“If reduced federal royalty rates stimulate new leasing, exploration and production, that also could increase other kinds of revenue,” said Lorraine Henry, a spokesperson for Alaska’s Department of Natural Resources.

In North Dakota, where federal royalties are split evenly between the state and county governments where drilling occurs, State Office of Management and Budget Director Joe Morrissette acknowledged the industry’s future remains difficult to predict.

“There are so many variables, including timing, price, availability of desirable tracts, and federal policies regarding exploration activities,” Morrissette said.