SANTA FE, N.M. — The messy issue of increasing local taxes to offset the loss of “hold harmless” payments from New Mexico state government – under a scenario that in some cases allows local governments to gain much more tax revenue than they’ll be losing – has moved to the courts.
The city governments of Santa Fe and Española, along with a group of businesses – and with Las Cruces seeking a judge’s OK to join in – have filed suit to challenge Santa Fe County’s new gross receipts tax increase that is supposed to go into effect on July 1.
At issue is whether the county can impose this particular tax levy within city limits, and whether that’s fair to businesses and shoppers who face two tax increases – one from the county and one from the city.
It’s the latest tussle over part of a tax package the Legislature approved in a deal with Gov. Susana Martinez in 2013, providing a new way for cities and counties to replace government revenue lost when gross receipts taxes were removed from food and medicine.
Critics say the tax plan inadvertently created winners and losers among local governments and businesses, and that it has set up potential “double taxation” on businesses and people who shop within city limits. The gross receipts tax is the levy that, for consumers, shows up as an add-on to purchases of goods and services, similar to a sales tax.
The hold-harmless issue, says veteran New Mexico Municipal League director Bill Fulginiti, “has become very emotional.”
Steve Kopelman, director of the New Mexico Association of Counties, doesn’t believe the cities’ lawsuit has merit. But if Santa Fe and Española were to win the case, it could have a dramatic impact in the 17 counties that have “hold harmless” taxes on the books and possibly even on other, prior county GRT taxes that apply within city limits, he said.
“If they win and especially if the decision extends to other GRT increments for the counties, we would have a major revenue crisis,” Kopelman said. “Bonds would be in default.” He also said balanced budgets and financing essential services would be endangered.
Supporters of the cities’ position say the suit attacks only the one-eighth of 1 percent hold harmless tax increase the County Commission approved in March – and not at least four pre-existing countywide gross receipts tax increments that now apply within city limits.
In any case, $4 million a year in tax revenue for Santa Fe County from the new tax is under legal siege. The county says in a court filing that the new money is supposed to go for projects like a new administration building consolidating services at the old courthouse site on Catron Street with “improved citizen access.”
The convoluted tax fight will play out in state District Court Judge Sarah Singleton’s courtroom starting today, with a hearing scheduled on a request from Santa Fe and Española that the county be enjoined from imposing the tax increase for now, while the case is litigated.
Kopelman said the controversy is symptomatic of a broken gross receipts tax system in New Mexico, with too many exemptions that drive up rates. “We have to get a handle on it,” he said. “I think that really the only way to go is a complete reset on GRT.”
Funding dates back a decade
Hold harmless funding dates back to 2004, when the Legislature decided to remove gross receipts taxes from sales of 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 counties and cities to make up for their lost dollars.
In 2013, the tax deal that popped out of the Legislature near adjournment resulted in a plan to eliminate the hold harmless payments in a 15-year phase out, with reductions of 6 percent or 7 percent a year, starting with the 2015-2016 fiscal year beginning in July.
The change meant more money for state coffers. The tax package did allow local governments to make up their lost dollars by granting them the authority, on their own and without having to get voter approval, to increase GRT by up to three-eighths of 1 percent – which translates to about 38 additional cents on a $100 purchase.
In March, the Santa Fe County Commission voted to up the GRT by one-eighth of 1 percent under the hold harmless authorization granted by the state. The increase amounts to about 12.5 cents on a $100 purchase and would raise about $4 million a year for county government.
At least for the first several years of the state’s hold harmless phase-out, the tax increase means a big financial boost for the county. It’s been getting about $3.3 million a year in state hold harmless payments and will continue to get most of that as the phase-out kicks in, along with the $4 million in new revenue from the tax increase.
Other counties have made out even better. Otero County increased taxes by about $2.4 million to replace the loss of about $390,000 in hold harmless payments from the state.
Fulginiti said legislators, based on numbers for statewide GRT, thought they were providing local governments tax authority just sufficient to replace the hold harmless payments. “They shouldn’t be getting more,” he said.
Now, counties in particular are taking advantage of the new taxing authority granted by the state to add to their coffers.
The Santa Fe County tax, as passed by the County Commission with no public opposition, would apply county-wide, including within the city limits of the county’s three incorporated municipalities – Santa Fe, Española (which spreads across the Rio Arriba/Santa Fe county line) and Edgewood.
The lawsuit by Santa Fe and Española maintains the county cannot impose this particular tax within the city limits. Specifically at issue is what the Legislature meant when it said county commissions could impose a hold harmless gross receipts tax on persons “engaging in business in the county.”
What does ‘county’ mean?
The Santa Fe/Española lawsuit cites state laws from 1978 that say that county ordinances don’t apply within city limits.
That means, the lawsuit maintains, that, “as a general rule” and “in general legislative usage,” county ordinances don’t apply in the cities.
The suit notes that in other sections of the tax code, the Legislature was specific when it “unambiguously” authorized county commissions to impose certain taxes, such as a “quality of life” GRT, county-wide and including within city limits.
This shows that the Legislature knows how to specify when it wants to allow a county to impose a tax in the cities and that counties can’t do that “unless specifically authorized in the authorizing legislation,” the lawsuit maintains.
But the county, in a response filed this week, says the cities’ interpretation is all wrong and ignores state tax law that is “consistent and presents a harmonious whole.”
The response notes that the 2013 hold harmless tax measure doesn’t define the word “county,” but that in other sections of the tax code, the term “county area” is used to specify when a local-option tax is restricted to only the unincorporated parts of the county and can’t be applied in cities.
The phrase applying the tax to any “person engaging in business in the county,” part of the hold harmless tax, is used “in those sections authorizing a county-wide local option GRT,” the response states, such as a county health care tax.
The business plaintiffs in the lawsuit are located in the Santa Fe County portion of Española, whose city limits stretch across the Rio Arriba/Santa Fe county line.
Española has already imposed its own “hold harmless” tax, meaning the business plaintiffs will face two increases if the Santa Fe County tax stands. These north Santa Fe County businesses will have the highest GRT rate in the state, at 8.9375 percent.
The same kind of double wallop would happen in Santa Fe if the City Council were to adopt its own hold harmless tax. Rio Arriba County has not enacted a such a tax.
The lawsuit plaintiffs argue that it’s not likely the Legislature “intended businesses within municipalities to have their receipts double-taxed by two local governments” to make up for loss of the hold harmless payments.
“Did the Legislature actually intend by the use of three words in the statute, ‘… in the county,’ to allow potential application of both the city and county tax to these businesses because of the historical accident of their location in both jurisdictions?”
The county’s response doesn’t address whether it’s fair for businesses to be taxed twice, but says this situation doesn’t amount to illegal double taxation. It says the state Supreme Court has long defined impermissible double taxation as “imposition of the same tax, by the same taxing power, upon the same subject matter.”
The two sides are also fighting over whether the tax can legally be imposed starting July 1 instead of later, based on whether the county completed all required actions in time to have the tax kick in for the new fiscal year.
The state Taxation and Revenue Department, also named as a defendant in the lawsuit, says in its own court filing that it’s too late to call off the tax increase now. Notice and “filer kits” including the new tax rate have already been sent out and new notices would cost $50,000, in addition to other time and expense at this late date, the department says.