A three-quarters of a cent sales tax hike would reduce how much water rates would increase to pay for a new water treatment plant in Rifle by a half million dollars, according to City Manager John Hier.
A comparison of a half-cent and a three-quarters cent sales tax hike was presented to City Council at a July 18 workshop. The council had asked city staff to look at how water rates could be revised if a three-quarters cent sales tax were approved by city voters to support financing the new $25.5 million plant.
The city wants to get the money for the plant through a loan from the Colorado Water Resources and Power Authority.
City officials have said the existing Graham Mesa plant is aging, undersized to serve projected population growth and unable to meet possible tougher federal water quality standards in the future.
Under the water rate structure approved earlier this year by council to help repay the loan and cover operating costs of the new plant, the base rate charged to city water users would nearly double.
At the workshop, Hier said a three-quarters of a cent sales tax would reduce the rate structure by $500,000 and, along with water revenue, still raise the $4.2 million needed for operating and maintenance of the new plant, plus annual debt service.
"So you could say that's a big bite out of the apple" water users would not have to pay, Hier added.
A rate study found the city now receives $2.1 million a year under present water rates.
The city's current sales tax rate is 3.5 percent. Combined with Garfield County and state of Colorado sales tax rates, someone who makes a purchase in Rifle now pays 7.4 percent in sales tax. Finance Director Charles Kelty said Monday that a half-cent increase would bring the total to 7.9 percent and a three-quarters cent hike would result in a 8.15 percent sales tax in Rifle.
Councilman Jonathan Rice said he wondered if it really mattered at what rate the sales tax hike was proposed.
"I think a lot of voters will just vote yes or no," he added. "It won't matter because they just don't want higher taxes."
Rice said if the city sales tax revenue declines, water rates would need to be increased to ensure the city meets its operations and maintenance needs and debt service.
Hier cautioned the city should not immediately raise those rates after just one year of reduced revenue. He favored waiting at least another year to see if the downward trend continued.
Hier noted that while Rifle's current sales tax revenue is up over last year, it is still below 2008 and previous years.
Rice said as a water user, he would favor paying up to $4 more on the base rate, with lower tier rates.
Councilman Keith Lambert said as a consumer, he would favor the three quarters of a cent sales tax, with lower tiers.
"But I have a big concern on how that could affect the business community," he added. "So maybe a half cent tax is better for them."
Mayor Jay Miller said one downtown business owner told him any tax hike the city might impose was a concern.
Councilwoman Jennifer Sanborn, a downtown business owner, said she also had a concern, but wondered what some of the city's larger businesses, such as car dealers and grocery stores, might think about the sales tax rate.
"I can tell you that I had a leaking appliance this year, and if that happened under the higher rates we've been talking about, I would have been in a world of hurt," she said.
Hier said council also asked how the rates could be affected if the city uses $3 million in capital reserves to reduce the construction costs of the plant. A $3 million contribution will reduce annual debt service by about $180,000, Hier said. Based on 3,600 water users, that would result in an average reduction of about $4 per customer.
City Attorney Jim Neu said the city should close on the $25.5 million loan before it finalizes the sales tax hike rate.
"I'd like to point out that if the project somehow comes in under the engineer's estimate, we can pay off more of the principal on the loan and decrease the water rates," since the city won't need to spend it on the new plant, he added.
Neu called it "strange" to use sales tax revenue for a water project, "Because you generally don't want to mix general fund moneys with enterprise funds," such as water rate revenue.
Neu said the City Council could discuss the sales tax issue at its two August meetings, but would need to decide on a figure and vote on a ballot question before the end of that month.