Summary:

 House Bill 538 (HB 538) establishes two corporate income tax credits to incentivize industrial decarbonization in New Mexico. The Industrial Decarbonization Production Corporate Income Tax Credit provides a credit of $85 per metric ton of reduced carbon dioxide equivalent emissions, up to $10 million per qualified facility per taxable year, with the potential for an increased cap of $15 million for facilities meeting additional job creation and investment criteria. The Industrial Decarbonization Investment Corporate Income Tax Credit allows a credit equal to 10% of qualified expenditures, up to $5 million per facility, with a possible increase to $7.5 million under similar conditions. The Department of Environment certifies eligibility for both credits. The total aggregate amount of credits is capped at $30 million in 2026, $50 million in 2027, and $100 million in each subsequent year. The credits are non-refundable but may be carried forward for three years. The bill applies to taxable years beginning on or after January 1, 2025, and is repealed effective January 1, 2033. 

Legislation Overview:

 House Bill 538 (HB 538) creates two corporate income tax credits under the Corporate Income and Franchise Tax Act to encourage emissions reductions and decarbonization investments in industrial facilities. The Industrial Decarbonization Production Corporate Income Tax Credit allows facilities that reduce their net carbon dioxide equivalent emissions by at least 40% below the industry benchmark to claim a tax credit of $85 per metric ton of emissions reduced, up to a maximum of $10 million per facility per year. If a facility is determined to have a high likelihood of creating jobs, attracting significant investment, and reducing emissions by at least 50% below the benchmark, the Department of Energy may approve an increased cap of $15 million per facility per year. Facilities must provide a life cycle assessment of emissions reductions and other supporting documentation to the Department of Environment for certification.

The Industrial Decarbonization Investment Corporate Income Tax Credit provides a credit equal to 10% of qualified expenditures on equipment dedicated to emissions reductions, up to $5 million per facility. Facilities meeting additional job creation and investment thresholds may be eligible for an increased cap of $7.5 million per facility. To qualify, facilities must also be eligible for the Industrial Decarbonization Production Corporate Income Tax Credit. The Department of Environment certifies eligibility and transmits approved certifications to the Taxation and Revenue Department. The total aggregate amount of credits issued is limited to $30 million in 2026, $50 million in 2027, and $100 million annually thereafter.

Both credits are non-refundable, but taxpayers may carry forward unused credit amounts for three years. Taxpayers may transfer or sell the credits, and all transfers must be reported to the Taxation and Revenue Department. The credits must be claimed within 12 months of the issuance of a certification of eligibility. The Taxation and Revenue Department must include the credits in the annual tax expenditure budget. The provisions of HB 538 apply to taxable years beginning on or after January 1, 2025, and both credits will be automatically repealed on January 1, 2033.

Implications

HB 538 provides financial incentives for industrial facilities to invest in emissions reduction technologies and adopt cleaner production methods. By tying credit eligibility to significant emissions reductions, the bill encourages industrial producers to align with state and federal climate goals. The production-based tax credit rewards facilities that achieve measurable emissions reductions, while the investment-based credit offsets the cost of upgrading industrial equipment and infrastructure. The requirement that facilities provide detailed life cycle assessments ensures that emissions reductions are rigorously documented and verified.

The credit structure may attract new industrial investments to New Mexico, particularly in sectors such as cement, steel, hydrogen, and glass production, where decarbonization technologies are becoming more widely adopted. However, the application and certification process, including the requirement to meet stringent emissions benchmarks, may pose administrative burdens for companies seeking to claim the credits. The ability to transfer or sell the credits provides additional flexibility for businesses that may not have immediate tax liabilities.

The fiscal impact of the credits will depend on the level of participation and the extent to which facilities meet the required emissions reductions. The phased-in aggregate caps ensure that the state’s financial exposure remains predictable, but the long-term effectiveness of the credits in driving substantial emissions reductions remains uncertain. Additionally, because the credits cannot be claimed in conjunction with the federal carbon sequestration credit under Section 45Q of the Internal Revenue Code, facilities will need to assess whether state or federal incentives provide the greater financial benefit. 

Current Law:

 Under current law, New Mexico does not offer corporate income tax credits specifically for industrial decarbonization. Existing incentives for renewable energy and environmental sustainability are primarily focused on electric generation and consumer-level energy efficiency improvements rather than industrial production processes. Some industrial facilities may be eligible for federal tax incentives, such as the Section 45Q credit for carbon capture and sequestration, but no state-level incentive exists for direct emissions reductions at industrial facilities.