Local Governments in Texas, New Mexico, and Pennsylvania May Bear the Brunt of Oil and Gas Busts
A new report finds that New Mexico, Texas, and Pennsylvania take different approaches to oil and gas fiscal policy, but none have policies to protect the finances of local governments.
💡 What’s the story?
Some US states rely on oil and gas production to fund public goods and services like education, infrastructure, and public health. Booms and busts can destabilize these valuable funding sources, as can the long-term trend away from an economy built on fossil fuels.
In a new report, researchers at Resources for the Future (RFF) analyze how oil and gas revenue policies support—or imperil—long-term fiscal stability in New Mexico, Texas, and Pennsylvania. The researchers find that these states take different approaches to oil and gas fiscal policy, but none have policies to protect the finances of local governments.
Expert Perspective
“Tax policy is an incredibly important—if overlooked—issue to address as the United States’ relationship with fossil fuels changes. But to have solutions that support communities, we need leaders at the local, state, and federal level to first understand how big of a role oil and gas plays in funding public services in many communities.”
—Daniel Raimi, RFF Fellow and Director, Equity in the Energy Transition Initiative
🛢️ How are the states affected?
New Mexico is heavily dependent on oil and gas revenues but has taken proactive steps to manage its fiscal risks for the years and decades to come. Roughly half of its oil and gas revenues go to permanent funds that largely benefit statewide education programs, and 10 percent flows to counties, school districts, and other local government functions. Oil and gas revenues make up 26.9 percent of state and local revenue and 9.6 percent of state GDP.
Texas, as the nation’s leading oil and gas producer, collects more revenue from oil and gas extraction than any other US state. It saves some of that revenue in permanent funds to support statewide education and some in a short-term “rainy day” fund that can address near-term revenue volatility for the state government. However, Texas does not save any revenue to support local government services, nor does it invest in permanent funds to support state services. This introduces fiscal risk for the state and for communities where extraction is concentrated. Oil and gas revenues make up 5.7 percent of state and local revenue and 7.6 percent of state GDP.
Pennsylvania collects relatively little from oil and gas extraction and has no long-term savings policies. Because the oil and gas industry plays a relatively small role in the state’s economy, the lack of a policy presents little fiscal risk for the state as a whole. However, some natural gas–producing communities receive substantial revenues from the state impact fee, so they could face fiscal risks if they become heavily dependent on that revenue stream. Oil and gas revenues make up 0.6 percent of state and local revenue and 1.3 percent of state GDP.
Across the three states, the largest revenue mechanism is severance taxes, which account for 35 percent of all collections on average across the three states. Revenue mechanisms vary widely across states, with Pennsylvania and New Mexico deriving large shares of revenue from public land leases, and Texas generating large returns from property taxes.
Expert Perspective
“Notably, there is no centralized location where all this data is available. For leaders to reach a good understanding of fossil fuel revenues, we first need useful repositories for that data. We found a lot of information on public websites or reports, but we also had to get information from state offices through emails and public records requests. If those failed, we estimated revenue flows based on state statutes.”
—Zach Whitlock, RFF Senior Research Analyst
🏛️ What are the policy implications?
New Mexico receives approximately 46 percent of its oil- and gas-related revenue from public land leases. The passage of the 2025 One Big Beautiful Bill Act, which reduced federal royalty rates from 16.67 percent to 12.5 percent, will reduce revenue for New Mexico from federal land leases. However, a new law will allow the state to increase royalties on some state lands.
The authors also point out that states and localities often lower tax rates in response to growing oil and gas revenues. This “one-way ratchet” creates an ongoing risk that local governments may struggle to raise adequate revenues during busts, especially since it is politically difficult to raise tax rates.
The findings show that there is opportunity for states to enact policies to shore up risk: none of these states have enacted policies to protect the fiscal health of the often-rural local governments where extraction takes place, raising concern about the impact of revenue volatility in these locations.
📚Where can I learn more?
Read the report, Save It or Spend It? How Do New Mexico, Pennsylvania, and Texas Manage Oil and Gas Revenues for the Future?, by RFF Fellow Daniel Raimi and Senior Research Analyst Zach Whitlock.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
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