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Tax hike looms as subsidies are cut

Some city and county governments in New Mexico say they could be forced to raise taxes after the Legislature’s last-minute deal to phase out state reimbursements to local governments for not taxing food and medicine.

For the state’s large cities, the change will mean losses of millions of dollars per year.

Albuquerque, for example, received about $36.7 million from the state’s “hold harmless” subsidy in 2011 to offset the loss of local tax revenues since gross receipts taxes on food and medicine were eliminated in 2004.

But the phase-out does not start until 2016, and the depth of the pain around the state is still being gauged.

Albuquerque, the state’s largest city, can absorb the losses in the short term without a tax increase, Mayor Richard Berry said.

Other cities and counties with bigger budget problems might not.

“Some cities from what I can see, possibly (are) going to have to increase taxes,” said William Fulginiti, executive director of the New Mexico Municipal League.

“We’re not sure exactly (how many) yet until they see a year-by-year breakout,” Fulginiti said.

The plan adopted by the Legislature in its final minutes on March 16 will require large and mid-sized city and county governments, starting in 2016, to accept a payout between 6 percent and 7 percent smaller each year until the hold-harmless subsidies for the food and medicine taxes are entirely eliminated by 2030.

In Albuquerque – the state’s No. 1 recipient of the funds – the change will mean about $2.2 million less in annual state funding starting in 2016. The yearly budget cut would double to nearly $4.5 million in 2017 as the annual losses compound.

Overall, the reduced state subsidies are expected to affect the 21 largest of the state’s 104 incorporated communities and the 12 largest of its 33 counties.

Cities with fewer than 10,000 residents and counties with fewer than 48,000 will continue to receive the hold-harmless subsidies.

The hold-harmless provision for cities and counties came into being after the Legislature decided in 2004 to eliminate gross receipts, or sales, taxes on most food items, medicine and medical services. The idea was that the state would absorb the lost tax revenue and spare local governments from the impact.

How it works

The elimination of the hold-harmless provision this year was a key component in the multi-pronged tax reform package backed by Gov. Susana Martinez.

Martinez is expected to sign the legislation into law.

Getting rid of the hold-harmless provision for cities and counties, which will effectively increase revenue for the state, was intended to offset financial losses from state tax cuts in the package.

Those tax breaks include a reduction in the corporate income tax rate from 7.6 percent to 5.9 percent and a lighter tax burden for manufacturing companies that sell their goods out of state.

Another provision in the tax package to offset the loss of state revenue from the cuts is a requirement for so-called “big box” stores to change the way they pay taxes to New Mexico.

To help local governments deal with the phase-out of the hold-harmless subsidies, the Legislature agreed to allow affected municipalities or county governments to increase local gross receipts taxes by as much as 3/8 of 1 percent on goods or services except food and medicine.

The tax increase could be imposed by local governments without a citizen vote in most cases.

Some local governments say that tax hike may be needed. They say the lost state money adds new financial pressure to local budgets already strained by earlier cuts needed to weather years of economic recession.

Service cuts or tax hikes

“It’s either cut services and jobs – of which we’ve already lost an estimated 6,000 up here in the last 4 or 5 years – or raise taxes,” said San Juan County CEO Kim Carpenter.

“There’s no middle ground,” Carpenter said. “There’s no way we can do nothing.”

San Juan County would lose hold-harmless subsidies of about $156,000 per year the first year the cut takes effect, based on the total $2.6 million the county received in 2012. The full hold-harmless payment represented about 1.8 percent of San Juan County’s $140 million budget in 2012.

However, Carpenter said past budget cuts and continued declines in the region’s struggling energy industries make even $156,000 of added losses in 2016 unbearable.

“There’s a sentiment among the folks of local governments that said, we’re not going to wait (until 2016 to impose a tax hike), because while we’re imposing the tax, fingers are going to be pointing at Santa Fe,” Carpenter said.

In Alamogordo, $2.8 million in hold-harmless payments in 2011 totaled more than 11 percent of the city’s $25 million budget.

Alamogordo Mayor Susie Galea said the losses could require a tax increase to maintain city services, despite the fact that the cut would total about $170,000 the first year it takes effect.

“I think we’re on a shoestring budget as it is,” Galea said. “I think we will have to cut social programs to make due with that loss.”

Asked if the city would enact the allowed tax increase to balance the budget, Galea said, “We may have to seriously consider that.”

Not the ‘end of the world’

Sen. John Arthur Smith, a Democrat from Deming who led the crafting of the tax package and advocated the repeal of the hold-harmless subsidies, said fears voiced about local tax increases amount to political posturing.

“I just think they’re crying wolf when it’s not necessary,” Smith said.

“I just don’t think we’re (state government) in a position to subsidize local government any more. I don’t see it as the end of the world if the communities are well managed.”

Some local governments say the reduced hold-harmless payments likely won’t break the bank.

Albuquerque leaders are reviewing how other tax policies included in the just-passed tax legislation might help the city attract new business and potentially offset the loss of nearly $37 million in state subsides by 2030, Berry said.

An Albuquerque tax increase is off the table initially, but Berry said the city needs more analysis on the full tax package to determine how the changes will affect Albuquerque’s long-term budget plans.

“We have to find a way to calculate the growth of the pie,” Berry said. “… When we finally get those numbers put together, that’s when we’re going to have a better handle on the total cost to the city and what the impact is going to be.”

Bernalillo County Commissioners Wayne Johnson and Lonnie Talbert said in a letter to the editor that the county can find alternatives to a tax increase to offset the phased-out loss of the $10.7 million subsidy without a local gross receipts tax hike.

“We are confident that we can find better alternatives, such as implementing cost savings, or simply responsibly controlling the rate of growth of county government over the next 17 years so that we grow into the reduction of state funds,” the Bernalillo County commissioners said.

The governor’s take

Some local government officials are critical of the governor’s support for the tax deal because she previously pledged to veto a repeal of the hold-harmless subsidies for lost food and medical tax revenues.

Martinez repeated that promise during a speech for the New Mexico Municipal League in February.

Martinez spokesman Enrique Knell said the governor only agreed to elimination of the hold-harmless provision because it was a necessary component of the compromise legislation to lower corporate income taxes and create other incentives to attract new business to New Mexico.

“Unfortunately, there is no choice of just vetoing hold-harmless,” Knell said Friday. “That was never a choice that we had. The real choice facing her: Do you sign the entire package (of tax reforms) or do you veto the entire package.”

No input

Local government leaders expressed concern about the way the tax package was cobbled together during the final hours of the session and passed into law before communities affected by the changes had an opportunity to weigh in.

“There are a lot of good things in the bill,” said Santa Fe County Manager Katherine Miller. “It’s not an all-bad bill, it’s just I think that the local governments that were affected by it negatively didn’t have a chance to participate in the discussion.”

Miller said it’s too early to tell whether Santa Fe County would need to consider a tax increase to offset the phased-out hold-harmless subsidies. The county in 2012 received about $3.3 million in the payments.