FARMINGTON — Local government leaders said the phase-out of payments to counties and cities for not collecting taxes on food and medicine will have a devastating effect on operations, but questions remain as to what should, or shouldn't, be done to offset the loss in revenue.

Farmington received $5.7 million and San Juan County received $2.5 million in "hold harmless" payments in the 2013 fiscal year, according to government records. A bill passed by the New Mexico Legislature last year and signed into law phases out those payments over a 15-year period.

Sales of food and medicine have been tax-exempt in New Mexico since 2004. To fund "hold harmless," New Mexico lawmakers imposed a 0.5 percent increase on the gross receipts tax on non-food items.

Supporters of exempting food and medicine from gross receipts taxes argued the taxes disproportionately impact the poor and large families, said Fred Nathan, the executive director of Think New Mexico, a statewide think tank.

Republican Sen. Steve Neville, who represents San Juan County, introduced one of at least two bills in the New Mexico Senate this week that will offset the effects of phasing out the "hold-harmelss" payments.

Neville said the state needed to reform "hold harmless" because statewide payments had grown from $40 million when they started to about $140 million 10 years later.

In his bill, "hold harmless" payments would be eliminated and counties and municipalities would receive 0.25 percent of the .5 percent gross receipts tax that formerly funded the payments.

Neville's bill also would allow for counties and municipalities to impose a small additional gross receipts tax increase if that payment didn't equal 90 percent of their "hold harmless" payment.

Neville acknowledged that for some governments the gross receipts tax won't be as much as the "hold harmless" payment they relied on for years. But he said his bill would end a "sloppy tax policy" that based "hold harmless" payments on uncollected gross receipts.

"Maybe there are some losers in my deal," Neville said. "But a phase out over time is more damaging. ... (This bill) minimizes the amount of tax increases the counties and cities would be forced to make."

Other local government leaders across the state favored taxing food to offset the loss in revenue from the "hold harmless" legislation.

Bill Fulginiti, the executive director of the New Mexico Municipal League, said the organization favors allowing cities and municipalities to tax food instead of relying on "hold harmless" payments. The league, which includes elected officials from municipalities across the state, voted 67-1 in support of a bill that would allow food to be taxed.

Farmington City Councilor Dan Darnell is a member of the municipal league and voted in support of the measure, Fulginiti said.

Farmington City Council Jason Sandel said that vote doesn't represent the thoughts of the entire City Council, which never voted on a resolution that took a position on "hold harmless" or food tax legislation. He said he supported the law that ended "hold harmless" payments.

"The city has not taken a position that 'hold harmless' payments should be replaced," Sandel said. "It's bad tax policy to have tax exemptions and then hold counties and municipalities harmless. The state did the right thing" by ending "hold harmless."

While Sandel said there are aspects of New Mexico tax law that need to be reformed, he was in favor of accepting the current law and moving forward.

"The decision is made," Sandel said. "We need to think about how (the city of Farmington) is going to live within its means instead of fighting about the issues of yesterday."

Fulginiti said the municipal league is still considering Neville's bill and may support it.

Think New Mexico favored a law that would support reinstating "hold harmless" payments instead of a food tax, Nathan said.

"The solution is not reimpose food tax on the working people of Farmington, but for the Legislature to keep their end of the bargain and restore 'hold harmless,'" he said.

San Juan County Commissioners passed a resolution earlier this month that was critical of the law that phased out "hold harmless" payments. The county hasn't taken a position on the best way to negate the effects of last year's legislation, but Commission Chairman Jack Fortner said this week that county officials were working with local elected officials to find a way to replace the revenue.

The phaseout of "hold harmless" payments appear devastating for Farmington, City Manager Rob Mayes said.

The city would lose $380,000 the first year of the phase-out and an additional $380,000 each year, according to city tax projections.

Mayes said a citywide 0.25 percent gross receipts tax, which Neville's bill calls for to replace the "hold harmless" payment, is currently worth $5.1 million in Farmington, which is more than $500,000 less than the city's most recent "hold harmless" payment.

Ryan Boetel covers crime for The Daily Times. He can be reached at 505-564-4644 and Follow him on Twitter @rboetel on Twitter.>