Bold claim: The race to drill cheaper oil on federal lands could quietly drain the fiscal backbone of states like New Mexico, even as they expand programs for families and future generations. But here’s where it gets controversial: the savings from lower royalties may come with big, slower-moving costs that ripple through state budgets for years.
A broad Republican push to reduce the cost of drilling on public land stems from a July law signed by President Donald Trump. That legislation lowers the federal royalty rate—from 16.7% back to 12.5% of the value of oil and gas produced—after a century at the higher level set by the 1920 Mineral Leasing Act. The Biden administration had raised the rate in 2022, and supporters of the rollback argue that lower royalties will spur more drilling, create jobs, and keep energy affordable as mining and extraction expand on public lands.
States typically receive roughly half of the money generated by federal royalties, with the exact share determined by where production occurs. Research from Resources for the Future estimates the policy shift could reduce federal royalty collections by about $6 billion over the next decade. New Mexico stands out because it is the largest recipient of federal mineral lease payments and has used the windfall to fund education initiatives and savings for the future.
Forecasts from economist Brian Prest at Resources for the Future indicate New Mexico could lose up to $1.7 billion in revenue by 2035 and as much as $5.1 billion by 2050 under the lower royalty regime. The impact will accumulate gradually since federal leases allow up to a decade to commence drilling and production, but state officials are already bracing for tighter budgets.
Within New Mexico, more than one-third of the general fund depends on oil and gas activity. The state has built a “nest-egg”—a substantial portfolio of investment trusts totaling about $64 billion—to support ongoing programs like universal preschool, tuition-free college, free school meals, and child-care subsidies. Earnings from these trusts rank as the state’s second-largest source of general fund spending.
New Mexico’s financial posture helped it weather the federal government shutdown earlier this year, when lawmakers used state funds to subsidize the health insurance exchange, food assistance, and public broadcasting. Yet as predictable revenues wane, lawmakers recognize the need to manage expectations and plan for leaner years. State Senator George Muñoz notes that even if federal royalties decline, the state may still pursue higher investments in mental health services and Medicaid, emphasizing that meaningful progress often takes time to materialize.
The current royalty-rate increase that existed for about three years coincided with muted leasing activity; state budget forecasters did not count the extra income during that period.
New Mexico’s “nest-egg” strategy has helped fund ambitious initiatives amid a surge in local oil production since 2017, benefiting teacher salaries, public college opportunities, universal meals, and other programs. The state has also set aside billions in investment funds intended to shield budgets if demand for oil sags.
Meanwhile, there is renewed scrutiny surrounding universal free child care. Gov. Michelle Lujan Grisham’s proposal to broaden access faces questions about the appropriate level of funding, with some Democratic lawmakers cautioning that the costs could be unwarranted for households with relatively high incomes. And beyond child care, New Mexico is under court order to improve K-12 outcomes for Native American students and low-income families, a challenge in a state that has long struggled with education metrics.
Other states receiving the most federal royalties include Wyoming, Louisiana, North Dakota, and Texas. Texas shares the Permian Basin with New Mexico but has less federal land and thus less exposure to royalty-policy shifts. In Alaska, officials see potential for more development in places like the National Petroleum Reserve–Alaska, where the Willow project is underway, and where reduced federal royalties could spur new leasing. In North Dakota, royalty distributions are evenly split between state and county governments where drilling occurs, but officials emphasize forecasting challenges in a volatile industry.
As policy debates continue, the central question remains: will cutting federal royalties accelerate activity and revenue in the short term, or will it strain state budgets and long-term investments? What do you think: should states lean into expanded drilling with levers like higher state royalties and targeted investments, or pursue diversification to stabilize finances beyond oil? Share your thoughts in the comments.
