Those who hired lawyers to help them get compensation for losses to the biggest wildfire in state history won’t have to worry about additional taxes on legal services if Gov. Michelle Lujan Grisham signs the tax package sent to her by lawmakers last month.
But at least one elected official in the burn scar and a municipal advocacy group oppose the measure, saying it will deprive local governments that are also struggling after the Hermits Peak-Calf Canyon Fire of sorely-needed tax dollars. And the legislation’s sponsor ultimately withdrew his support in fear of how the measure could harm those small governments.
The tax measure approved by the Legislature gives tax credits to law firms for gross receipts taxes, which are basically sales taxes, on services they provide to victims of the fire. Law firms can only get the tax credit if they don’t pass the taxes onto fire survivors in their bill for services.
Lujan Grisham has until March 6 to sign the tax bill into law.
After the U.S. Forest Service accidentally ignited the 530-square-mile wildfire in spring of 2022, destroying hundreds of homes, local and national law firms arrived and began soliciting clients. Congress in late 2022 approved nearly $4 billion to compensate victims of the fire. In the same law, Congress capped payments to law firms at 20% of compensation they secure on behalf of clients.
Those legal services, like all goods and services in the state, are taxed by states and localities. The gross receipts taxes on legal services for Hermits Peak-Calf Canyon survivors are estimated to be about 7%, split among the state, counties and towns.
A $100,000 payment to a fire victim who hired a lawyer, for example, would mean $20,000 would go to lawyers, and then there would be an additional $1,400 in taxes on that payment levied on the fire victim without the legislation.
State senator Leo Jaramillo (D-Española) sponsored the legislation this session and said getting rid of the tax on survivors would let them keep more of the money they’re owed. Local law firms and advocates for fire victims spoke in favor of the proposal.
But as the bill wound through committee and ended up in the overall tax package, Jaramillo grew increasingly concerned about the impact it would have on local governments, he told fellow lawmakers. He mentioned there could be a substitute bill that would have “held harmless” local governments like the City of Las Vegas and Mora County, but it was never introduced.
Administratively, it would be “extremely difficult” for the New Mexico Taxation and Revenue Department to apply the tax credit for law firms only on the state’s portion of the credit, while still sending the revenue to local governments, department spokesperson Charlie Moore told Source New Mexico.
When the New Mexico Senate deliberated an 88-page tax package that included the provision, Jaramillo ultimately voted against it, saying that he was withdrawing support because local governments would be harmed.
Still, the Senate approved the tax reforms Feb. 12 by a vote of 26-13, and the legislation was sent to the governor for her signature. Jaramillo has not responded to repeated requests for comment since that vote.
While the 30-day session was ongoing, the three-member Mora County Commission voted 2-1 on a resolution supporting the bill, saying that the Commission believes landowners and residents “should not be penalized, through the imposition of gross receipts tax, for having elected to be represented by legal counsel.”
The Feb. 9 resolution also said “it is understood” that a substitute bill would allow local governments like Mora County to continue to collect their portion of the taxes, although that ended up not being the case.
Mora County Commissioner Veronica Serna was the lone vote against the resolution. She noted that the gross receipts tax is imposed on law firms, not their clients, and so Mora County could still collect the taxes it needs if law firms simply paid the tax instead of passing it on.
“So the vendor should be paying that tax if they really want to help the claimant, not expect the state of New Mexico or any of the counties to take it,” Serna said in an interview. “Because the State of New Mexico and Mora and San Miguel Counties, we’re victims as well.”
In response, Brian Colón, a lawyer with law firm Singleton Schreiber and former state auditor, told Source NM that the law Congress passed means law firms like his are already receiving less than their usual 33% cut, and that the legislation is an effective way to prevent fire victims from having to pay additional taxes on the funds they deserve.
“I’m very pleased that the legislature decided that those individuals who opted to hire attorneys will not have a gross receipts tax implication on that transaction,” he said. “And that makes me very happy. It’s the right outcome.”
It’s not clear how much of an impact the wildfire and subsequent floods had on Mora County’s tax revenues, according to online records. In the fiscal year leading up to the fires, the county received $317,000 in gross receipts tax revenues, comprising 11% of its $2.9 million budget.
It’s also hard to estimate how much in taxes the county could make from legal services provided to fire victims, Serna said.
A legislative analysis on the tax bill, while noting how difficult making a calculation would be, guessed that the state could give up between $7 million and $12.5 million in tax revenues in the upcoming fiscal year if the provision becomes law. The bill limits the amount in credits given to law firms to $5 million every year, a cap Colón said firms were very unlikely to hit.
The New Mexico Municipal League also weighed in against the provision, saying that “revenue loss could be especially detrimental to municipalities in fire affected areas, which may need to provide additional services to residents impacted by the fires.”
The Federal Emergency Management Agency is overseeing the compensation fund. As of Feb. 14, it had paid $391 million to individuals, government bodies and nonprofits, or about 10% of the total allocated by Congress. FEMA officials have said they hope to pay out $1 billion by Jan. 1, 2025.
