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‘Hold-harmless’ replacement tax would mean revenue boost

A proposed increase in the gross receipts tax in Santa Fe County – authorized by the Legislature to make up for state funding reductions – actually would provide an immediate and significant boost to county government’s budget.

The increase is allowed under provisions of a tax deal struck in the final moments of the 2013 legislative session, giving local governments a way to replace money that the state will start taking away in a 15-year phase-out that starts in July.

However, the new taxing authority allows many local governments – including Santa Fe County – to raise a lot more money than they’re losing for at least the first several years of the phase-out.

County Commission chairman Robert Anaya says he’s not shy about acknowledging that the proposed tax increase would be used to offset the reduction in state funds and provide money for “some of the community-based needs that we haven’t had the resources to do.”

The possible increase, set for a March 24 public hearing, is about “making us whole and also planning for the future,” Anaya said.

Meanwhile, the whole revenue/taxing scheme for what’s become known as “hold harmless” financing for local governments could change in the legislative session that ends March 21 – although state Sen. John Arthur Smith, D-Deming, chairman of the Senate Finance Committee, said the chances of that happening are “very iffy.”

Previous efforts to “fix” the hold-harmless scheme failed in last year’s legislative session.

Hold-harmless funding dates back to 2004, when the Legislature decided to remove gross receipts taxes from food and medicine, reducing the amount of tax revenue raised.

Cities and counties get a share of state GRT revenues so, to “hold harmless” local governments, the Legislature approved payments or subsidies to the counties to make up for the lost revenue.

Then, in 2013, the last-minute tax deal between the Democratic Legislature and Republican Gov. Susana Martinez resulted in a plan to eliminate the hold-harmless payments in a phase-out with 6 percent or 7 percent cuts annually over 15 years.

But, to make up for the phase-out, cities and counties were granted authority, on their own and without approval by voters, to increase the gross receipts tax in their jurisdictions by up to three-eighths of 1 percent – which translates to about 38 additional cents on a $100 purchase.

This arrangement has set off controversy because, in some local jurisdictions – but not all – what can be raised with the new taxing authority far outstrips the loss of hold-harmless payments.

Otero County, for example, imposed a tax increment to generate $2.4 million per year to offset its loss of less than $390,000 in annual hold-harmless payments from the state, according to Bill Fulginiti, executive director of the state Municipal League.

But Fulginiti, whose organization of cities has proposed changing the hold-harmless setup, said other jurisdictions, such as the city of Española, can’t raise enough to replace what the state is taking away.

SF County proposal

The County Commission is considering a one-eighth of a percent increase in the gross receipts tax, the tax that shows up on sales of goods and services. It would amount to 12-13 cents on a $100 purchase.

The tax increase would raise about $4 million a year for county government. But the county will be losing only about $230,000-$250,000 in fiscal year 2016 that starts in July. That amount of loss is a fraction of about $3.3 million in hold-harmless money from the state that the county is losing in the first year of the hold-harmless phase-out.

For the year, the county will in effect more than double its money – it still gets almost all of the hold-harmless money, then would add on the $4 million in new tax revenue.

The phase-out losses will be greater in each subsequent year, probably about a half-million in fiscal year 2017. But the county will still come out ahead for a while with the new tax revenues exceeding the state funding reductions.

County Commission chair Anaya, defending consideration of the tax increase, said the county faces many spending mandates from state government, such as court and jail operations, and public health programs, as well as 2014 legislation that requires counties to contribute to a “safety net” pool for indigent health care.

“We continually have a growing base of unfunded mandates,” he said.

Anaya added that he’s always been “one of the commissioners who doesn’t like tax increases.”

“But, when a revenue source is pulled back, we have to look for something, not only for current needs, but also for the future,” he said.

He noted that a lot of counties have used the taxing authority given to counties in 2013 to impose bigger tax increases than the single one-eighth of a percent increment the Santa Fe County Commission has under consideration.

The scheduling of the public hearing on the tax proposal for March 24, a few days after the close of the legislative session, also gives the commission a chance to see if any changes to the hold-harmless setup will be enacted.

“We’re going to have a public hearing, have a discussion and make a determination,” Anaya said.

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