When the state phases out the current hold-harmless payment in lieu of sales taxes on food and medicine, Sandoval County doesn’t expect a major budgetary impact, but the City of Rio Rancho does.
The “hold-harmless” distributions from the state are designed to make up for the loss of revenue for local governments after the state eliminated sales taxes on food and medicine in 2004. This year’s tax reform and budget, House Bill 641, calls for the distributions to be phased out by 6 percent or 7 percent a year over a 15-year period, starting in 2016.
Cities with populations less than 10,000 people and counties with populations less than 48,000 can continue to receive hold-harmless distributions.
The removal of the hold-harmless distributions became part of the package to offset tax breaks intended to attract business, and thus economic development and related tax revenue once the companies are operating here.
“We are not expecting a major impact to the county from this, particularly in the short-term, since the county never got a large amount of revenue from gross receipts on food and medicine,” said county spokesman Sidney Hill.
The first year, the county is expected to receive $34,000 less, according to the New Mexico Association of Counties. The estimate takes into account projected growth in gross receipts.
Hill said the reduction won’t make much difference until the 2017-18 fiscal year, when the county is predicted to get $113,000 less. Then, officials may need to consider how to cover the loss.
By 2029-30, the association of counties predicts, Sandoval County will see $1.1 million less.
“But by 2029, who knows what’s going to be happening?” Hill said. “It’s hard to say what’s going to be the impact at that time.”
According to a report from City of Rio Rancho Financial Services Director Olivia Padilla-Jackson, estimates indicate the city’s general fund will lose about $252,000 in fiscal year 2015-16, up to $8.4 million in fiscal year 2029-30. Medical and food hold-harmless distributions have been among the highest-performing sectors bringing in sales tax-related revenue for the city.
In calendar year 2012, the city received about $3.7 million in food and medical hold-harmless distributions from the state, said city spokesman Peter Wells.
He said city staff doesn’t have a specific recommendation for how to handle the revenue loss.
“The issue will continue to be analyzed as well as the impact of other pieces of this legislation which are intended to generate economic development and subsequently more jobs and increasing revenues throughout communities in the state,” Wells said. “Ultimately, any action taken in the future as a result of the phasing out of hold-harmless distributions will be a policy decision made by the governing body.”
House Bill 641 allows cities and counties to impose a new gross receipts tax of up to three-eighths of 1 percent for any general fund purpose without a voter referendum, according to Padilla-Jackson’s report. Imposing a one-eighth of a percent new gross receipts tax would generate about $1.2 million the first year of the phase-out, while three-eighths of a percent would bring in about $3.5 million.
Also, the legislation has a “debt impairment provision.” It says if a city or county has pledged hold-harmless distributions to repay a debt, as Rio Rancho has, and the hold-harmless reductions would hamper the repayment, the state will continue to provide enough hold-harmless money for the local government to make the payments, as long as the amount isn’t more than the city would have received under current law.
“It is unclear how this provision will be administered,” Padilla-Jackson wrote.