Which order did you cut and how was material held down? Sometimes material will flex or bow up as material is removed. Did you use a down cut 1/8 and up cut 1/4? That can also lead to the issue as the up cut will tend to lift.
I've added a few thousandths on Z before cutting text using the offsets tab in Mach3. Bumping the feed down to around 30% to start with being careful where you start the tool again. Probably not the right way to do it. I'm interested in hearing all the experts approach on this.The 1" thick circle is very flat and was held down with 6 clamps. 1/4" DC 2 flute end mill being the first, clearance toolpath and 1/16" up-cut for the second pass. The clearance pass is dead on 0.125" deep. The second pass appears to be 2 to 3 thousands deeper. If the 1/16 bit slipped in the collet the pass would be shallower rather than deeper.
I'm wondering if there is a way to raise Z in Mach3 after the 1/16" tool change and zeroing before "Cycle Start".
This was a brand new bit so it's not a buildup problem. I do think your first sentence is likely the problem. I've had this problem before with small bits on the 2nd pass.The smaller bit may not be making good contact with the touch plate so it is going farther down before it completes the circuit and zero is set for the Z axis. Might help to make sure there is not chip build up or possibly pitch build up on your bit before trying to zero.
I figure you can adjust your Z height in Mach3 but my question would be how much do you need to adjust it each time. It will all depend on how the touch plate reading works each time. I have had problems with smaller bits with my touch plate and it is usually because of poor contact from build up on the bit.