FARMINGTON — A tax reform bill that would cut millions in state funding to local governments forcing cities and counties statewide to raise taxes, slash budgets or both awaits Gov. Susana Martinez' signature.

Farmington and San Juan County officials are already enacting significant budget cuts and say the loss of state funds is significant, battering an already fragile local economy.

"Local governments are the biggest casualties of this tax bill," said Farmington Mayor Tommy Roberts in a Wednesday phone interview. "We've already experienced four years of declining revenue, and a number of cuts have already been made. It's hard for local governments to find a silver lining in this tax bill."

Farmington and San Juan County would take the biggest losses, while Bloomfield and Aztec, for the time being, would not be impacted. Officials say they are considering tax increases and budget cuts to make up the shortfalls.

The bill in question is a last-minute tax reform package spearheaded by Sen. John Arthur Smith, D-Deming, Senate Finance Committee chairman.

If signed by the governor, the bill will cut what are known as "hold-harmless" payments to cities and counties with populations of more than 10,000. One of the bill's key components postpones the cuts until 2015, and then phases them in over 15 years.

The hold-harmless payments are part of a state policy enacted after food and medicine were exempted from taxation about a decade ago.


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The state has made payments in lieu of taxes to local governments to make up for the potential revenue losses.

But the payments have long been criticized as unsustainable.

When the state began making the payments, a study estimated they would cost about $40 million annually, Smith said in a Wednesday afternoon phone interview.

The cost has ballooned to $150 million annually, he said.

"The bottom line is that ... (cities and counties) have time to adjust," Smith said. "I think they can make those adjustments."

Although the situation is not ideal, some believe the cuts were unavoidable.

"It was getting more and more inevitable," said Sen. Steven P. Neville, R-Aztec, a member of the Senate Finance Committee. "This isn't ideal, but the initial deal was to repeal (hold harmless) all at once and only give a one-year notice."

The buffer time provides leaders statewide with an opportunity to achieve real tax reform, said Sen. William Sharer, R-Farmington, during a Wednesday phone interview.

"We will have a complete reworking of the tax system so that it's sane," he said. "Right now it's insane. We've been breaking our tax system for years. Now it's time for us to get serious about what our tax policy should be."

Sharer introduced a tax reform bill that would have replaced the state's gross-receipts-tax system with a 2-percent, across-the-board consumption tax, by cutting all but a handful of other taxes and repealing a number of tax exemptions and credits.

The bill never made it to a vote, but generated discussion in the Legislature.

Smith said he does not object to Sharer's bill and was pleased to see some discussion on the topic.

However, he remains less optimistic than Sharer on the possibility of real tax reform in New Mexico.

"I never envisioned that we're going to get legitimate, responsible reform," he said. "I've been here 24 years and it's all been piecemealed."

For Martinez and members of her administration, the tax bill was an unfortunate, but necessary compromise.

"The Governor has opposed these reductions in the past due to her concern about the impact that the sudden elimination of state funds could have on local governments," said Enrique C. Knell, Martinez's communications director, in a statement released to The Daily Times on Wednesday.

The governor, however, reassures local governments that she will work to make the transition as smooth as possible, Knell said.

FARMINGTON

Farmington officials, in the mean time, say they would be faced with the most difficult budget situation in the city's recent history.

The cuts will cost the city 11.4 percent of its gross-receipts-tax revenue once fully phased-in, according to data provided by City Manager Rob Mayes. Gross-receipts taxes, similar to sales taxes but charged to sellers rather than buyers, provide Farmington with 68 percent of its general fund. The money is used to pay for a myriad of programs and departments ranging from public safety to airport operations.

"When fully implemented, the city will be left with a permanent annual recurring loss to our current existing tax base of approximately $5.7 million dollars every year," Mayes said in an email statement. "Even phased over 15 years, the City is losing $375,000 compounded annually until it reaches $5.7 million a year."

In addition to the hold-harmless repeal, city officials are grappling with a $4.4 million budget deficit.

SAN JUAN COUNTY

County Executive Officer Kim Carpenter said the county is expecting to lose nearly $19 million over the 15 year phase-in period.

The county currently receives about $2.4 million annually.

Beginning in 2016, the payment will be reduced by $146,000 each year for 15 years.

"I can tell you I have not talked to one individual at the local government level who is happy about this legislation," he said.

The county is already in the midst of a significant budget cut, Carpenter said.

County officials have frozen 25 positions that would cost $1.25 million a year, cut part-time and seasonal employees and trimmed the government's vehicle fleet. The county has also recently imposed fees for transfer stations, fingerprinting and building department services that have historically been free.

"Taxpayers have had it good here because of industry," Carpenter said. "Times are changing."

Carpenter told the San Juan County Commission on Tuesday it was going to have hard decisions to make in the future.

"Two things can happen," he said. "We either have to raise taxes or cut services."

BLOOMFIELD AND AZTEC

While Farmington and San Juan County grapple with the potential revenue shortfall, a key provision within the bill exempts municipalities with fewer than 10,000 residents.

Recent census numbers show Aztec with fewer than 7,000 residents and Bloomfield with close to 8,000, a less-is-more benefit that offers the two cities immunity from potential budget woes.

Bloomfield Mayor Scott Eckstein said he was relieved to learn of the provision after looking into the legislation with City Manager David Fuqua and Brad Ellsworth, the city's budget director.

"I feel fortunate that we are a city with a population that means we're exempted," Eckstein said. "Farmington and the county are not so lucky, which is unfortunate in this economy."

But with a population that is the 10th fastest growing in the state, Bloomfield may be subject to future cuts if the city grows past the threshold, said Fuqua.

"The last census indicated the city grew by 26 percent," Fuqua said.

Josh Ray, Aztec city manager, acknowledged the provision, but said any changes to the budget will be done with the citizens' best interests in mind.

"We are disappointed to see the (hold-harmless) provision included in the tax package," Ray said. "Although there are provisions to compensate for the impact to our local budgets, those provisions still require imposing additional taxes. As with all decisions made by our state government, Aztec will do what is best for our citizens."

Greg Yee may be reached at gyee@daily-times.com; 505-564-4606. Follow him on Twitter @GYeeDT

Ryan Boetel may be reached at rboetel@daily-times.com; 505-564-4644; Follow him on Twitter @rboetel

James Fenton may be reached at jfenton@daily-times.com; 505-564-4621. Follow him on Twitter @fentondt