Abstract for: Closed and Open Loop Oil Taxation Policies in New Mexico

This paper develops a model to explore oil taxation policies for stabilizing oil tax revenue at high levels. The tax policies we examine include a) fixed, b) variable based on price trends, c) production-driven (regressive or progressive), and d) productivity-based. While the production-driven tax policy forms a closed-loop system, other policies perform in an open-loop system, independent of production. We calibrate the model for New Mexico, the third-largest oil producer in the US. Simulations show that a fixed tax policy generates relatively low but stable revenue. Price-adjusted tax policy yields higher but less stable revenue compared to the fixed tax. Compared to the previous cases, the production-driven tax policy produces more but less stable revenue. The productivity-based tax generates the highest and most stable revenue. We also test a closed-loop tax design, which performs better with the regressive policy when producers are sensitive to tax rates or when tax rates are high. In other cases, progressive tax rates will generate higher revenue. A regressive policy is likely to generate greater stability regardless of the circumstances, implying that short-term local treasury adjustments pay off more than long-term global adjustments.