The Permian basin, which straddles the border of west Texas and southeast New Mexico, has been a leading producer of domestic oil and gas for nearly a century. Production in the region was roughly flat or declining through most of the past 40 years until around 2010, when the application of horizontal drilling and hydraulic fracturing allowed operators to access a variety of tight oil formations such as the Bonespring, Delaware and Wolfcamp.
Gross receipts tax revenues for Hobbs, N.M.
We visited the Texas side of the Permian basin in January 2014, and recently returned to examine how this increased development has affected local governments on the New Mexico side of the border.
Generally speaking, in New Mexico we found that the boom has spurred substantial increases in government revenues, led by property taxes for counties and sales taxes (known here as “gross receipts taxes”) for municipalities.
In Hobbs, which lies just two miles to the west of the Texas border, the effects have been particularly dramatic. Many of the oil and gas service firms that operate in the Permian are located in Hobbs and, as new firms opened on the periphery of the city, government leaders increased revenue by annexing new land. In addition, a fast-growing population from the oil and gas sector increased gross receipts tax revenues in a variety of other areas.
As a result, these sales taxes – the city’s primary revenue source – have more than tripled over the past decade.
Hobbs has also experienced additional costs associated with population growth driven by oil and gas activity. It has added 30 police officers and 15 firefighters in recent years. Adding new staff has become more difficult as housing prices have gone up in this very rural region. The city spends roughly $6 million per year on incentive packages to entice new employees to move to Hobbs.
Still, new revenues associated primarily with gross receipts taxes have easily outweighed new staff costs. What’s more, the city has been able to make a number of major capital upgrades, including long-needed repairs to its sewer infrastructure, a new fire station and new parks facilities including a $12 million golf course and running trail. Each of these additions was bought with cash, and the city currently holds a cash reserve fund in excess of $100 million.
Oil wells and a natural gas flare in Eddy County, N.M.
To date, the growth in oil and gas activity has been beneficial for the city government’s finances. However, with oil prices falling nearly 50 percent in recent months, local officials are concerned that revenues may shrink and local economic growth may slow or even contract. The city’s reserve cash balance would help ease any challenges associated with decreasing economic activity, but local officials acknowledge that the only way to truly weather a downturn is to more thoroughly diversify their economy, a task which they currently have their sights on.
This research was carried out at the Duke University Energy Initiative with support from the Alfred P. Sloan Foundation.