Fiscal impact
reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for
standing finance committees of the NM Legislature. The
LFC does not assume responsibility for the accuracy of these reports if they
are used for other purposes.
Current FIRs (in
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Previously issued FIRs and attachments may also be obtained from the LFC
in Suite 101 of the State Capitol Building North.
F I S C A
L I M P A
C T R E P O R T
|
SPONSOR
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Lujan, B
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DATE TYPED
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02-15-04
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HB
|
625
|
|
SHORT
TITLE
|
Food and Medical Services Gross Receipts
|
SB
|
|
|
|
ANALYST
|
Taylor
|
|
|
|
|
|
|
|
|
REVENUE
|
Estimated Revenue
|
Subsequent
Years Impact
|
Recurring
or
Non-Rec
|
Fund
Affected
|
|
FY04
|
FY05
|
|
|
(500.0)*
|
(2,100.0)
|
Recurring
|
General
Fund
|
(Parenthesis ( ) Indicate Revenue Decreases)
* See fiscal implications narrative for details
SOURCES
OF INFORMATION
LFC Files
SUMMARY
Synopsis
of Bill
House Bill 625 removes the gross receipts tax
from food and certain health care services.
It creates new distributions to cities and counties to offset revenue
losses from removing those taxes. It
adjusts the county equalization formula, provides a penalty to taxpayers that
incorrectly report food and health services deductions, and it repeals the
municipal gross receipts tax credit.
These changes are summarized section by section in the following
paragraphs.
Section 1 Provides
a new distribution to municipalities to offset the foregone revenue due to the
food and health care tax deductions. The
distribution is made monthly and is equal to the food tax deductions claimed,
multiplied by the sum of the municipality’s local option gross receipts rates,
plus the 1.225 percent shared by the state.
Revenue from this distribution is considered gross receipts tax revenue
and may be used in the same manner, including payment of gross receipts tax revenue
bonds.
Section 2 Provides
a new distribution to counties to offset foregone revenues due to the food and
health care tax deductions. The
distribution is made monthly and is equal to the food tax deductions claimed by
businesses in the county, but not within a municipality, multiplied by the sum
of all county’s local option gross receipts rates.
Revenue from this distribution is considered
gross receipts tax revenue and may be used in the same
House Bill 625 -- Page 2
manner,
including payment of gross receipts tax revenue bonds.
Section 3 Creates
a penalty for incorrectly reporting food and health care practitioner services
deductions. The penalty is equal to the difference
between the correct tax amount owed and the amount paid multiplied by two.
Section 4 Amends
the county equalization distribution.
The base of the distribution is increased by adding 5 percent of the net
gross receipts attributable to the food deduction and 5 percent of the net
gross receipts attributable to the medical services deduction. These adjustments are made to offset the loss
of these receipts from the tax base due to the new deductions.
Section 5 Provides
a gross receipts tax deduction for the sale of food at retail food stores. The deduction applies to sales that are not
already exempt or deductible. The food definition
follows that of for food stamps. A
retail food store is also defined in a manner consistent with that used by the
food stamp program.
Section 6 Provides
a deduction for receipts
of licensed health practitioners from payments by a managed care provider for Medicare
Part C services or commercial contract services. Commercial contract services are services
provided through a contract with a managed care organization other than those
provided to Medicare and Medicaid patients.
Licensed health care practitioners include physicians, physician
assistants, osteopathic physicians, chiropractic physicians, doctors of
oriental medicine, podiatrists, psychologists, registered nurses, licensed
practical nurses, midwives, physical therapists, optometrists, occupational
therapists, respiratory care practitioners and speech pathologists or
audiologists.
Section
7 Repeals
the municipal gross receipts tax credit.
Section
8 Declares
the effective date for the bill to be January
1, 2005.
FISCAL IMPLICATIONS
TRD’s estimates the bill’s impacts on the
state’s general fund as summarized in the table below.
|
General
Fund Revenue Impacts
|
FY
2005
|
FY
2006
|
|
FY
2007
|
|
GRT food deduction
|
(52,700.0)
|
(107,000.0)
|
|
(109,000.0)
|
|
GRT health practitioners deduction
|
(15,700.0)
|
(33,500.0)
|
|
(35,700.0)
|
|
Repeal the municipal GRT credit
|
67,900.0
|
142,600.0
|
|
149,600.0
|
|
Net
General Fund Impact
|
(500.0)
|
2,100.0
|
|
4,900.0
|
It is important to note the bill only affects
the state general fund: gross receipts tax deductions have been designed to
have no impact on local governments. Thus, the general fund impacts shown in the
table include the hold harmless provisions provided for local governments. FY05
impacts are a little less than half of those in FY06, reflecting the January 1, 2005
effective, which implies only a half-year impact in the first year of the
proposed changes. The small negative general fund impacts shown in FY05 and are
expected to turn positive beginning in FY06.
This is because of the different growth rates associated with these
revenues: food tax receipts are expected
to grow by about 2 percent; health practitioners’ receipts by 6.7 percent; and
the municipal tax credit by 4.9 percent.
House Bill 625 -- Page 3
Fiscal impacts on
local governments are shown in the following table.
|
Local
Governments’ Revenue Impacts
|
FY
2005
|
FY
2006
|
|
GRT food deduction
|
(23,200.0)
|
(47,000.0)
|
|
Health Practitioners’ Deductions
|
(7,300.0)
|
(15,600.0)
|
|
Local Government Offsets (hold harmless)
|
30,500.0
|
62,600.0
|
|
Net
Local Governments’ Impacts
|
0.0
|
0.0
|
ADMINISTRATIVE
IMPLICATIONS
TRD reported the following administrative
issues:
·
Major computer system changes will be required to accept and track the
deductions and to make the appropriate adjustments to local revenue
distributions. Reprogramming the system
to track the deductions by location is possible. However, the effective date of January 1, 2005 should give the department enough time to incorporate
the changes.
·
Forms will need to be redesigned to accept and track the new
deductions. Taxpayer education efforts
will be greater than for normal changes.
For effective administration of local distributions, taxpayers must
separately calculate and report the deductions claimed for each business
location. This would create an
additional layer of administrative complexity, not only for the department,
which must track the deductions and incorporate them into monthly local
distribution calculations, but also for larger food retailers who may report
gross receipts to several different locations.
·
Ensuring that food retailers apply the deduction only
for qualified food sales might be a problem. While most retailers are likely to
claim only legitimate deductions, it will be almost impossible to identify
those who don’t. Typically when examining retail businesses with large sums of
cash flow, auditors have only cash register tapes with no (or very cryptic) descriptions
of purchases at their disposal. However,
this proposal does impose an additional penalty for overstating deductions. Such a measure may be helpful to ensure compliance.
·
No state administers a sales tax
exemption for food without litigation, protest and controversy. The
definitional problems are acute and continuing.
Fortunately, New Mexico
can adopt other state’s regulations to better create “bright lines”. The department will still face a significant
regulatory effort, however.
·
Provisions contained in the bill increase
the complexity of the GRT for taxpayers who do not currently participate in the
federal food stamp program, especially retailers who lack computer pricing and
scanning technology. Therefore, the burden will be more acute on the smaller retailers.
OTHER SUBSTANTIVE
ISSUES
The Blue Ribbon Tax Commission considered these
tax issues. Here are some of the
concerns and arguments for and against that were presented to the commission:
- Gross
receipts tax on food.
- Arguments
for a deduction: i) food is a
basic necessity and should not be subject to tax; ii) tax on food is
regressive—low income families pay a higher percentage of their income on
this tax than higher income families; iii) while food stamps provide help
to low income families, but not all participate in the program and food
stamps don’t cover the
House Bill 625 -- Page 4
- entire
food budget for many of these.
- Arguments
against: i)
while food is a necessity, there are other necessities that are taxed and
removing the food on tax could set a precedent for removing the tax on
other necessities, thereby narrowing the tax base; ii) a considerable
share of low-income families participate in the food stamp program, and
thus won’t benefit from the tax relief provided by lifting the food tax; iii)
higher income household will receive most of the benefit of the tax cut
in terms of dollars saved; iv) it would be less expensive to target this
tax relief to low and moderate income households
- Gross receipts on medical services.
- General
arguments for: i)
eliminating the tax increases providers take home pay, making it easier
to recruit and retain them; ii) providers practicing under managed care
plans cannot pass the tax to consumers; iii) only New Mexico and Hawaii
tax health providers’ receipts under a sales or gross receipts tax which
sends a bad signal as to the state’s medical business climate.
- General
arguments against: i) question as to whether
the federal government’s Center for Medicare and Medicaid Services might
interpret the exemption provided for health care practitioners’ gross
receipts as being too narrowly targeted at Medicaid; ii) managed care
plans may not pass on the tax savings to providers; iii) narrows the
gross receipts tax base.
TRD’s reported these
issues (and provided the attached map):
Regressivity of State Taxes:
·
A tax is said to
be “regressive” if it takes a higher percentage of income from poor households
than it does from richer households. The
gross receipts tax (“GRT”) on food is one of the regressive elements in the New
Mexico tax structure. According to national survey results, the percentage
of household income spent on food for home consumption decreases as household
income increases. Although the state
taxes many of the necessities of life in one form or another, the fact that
food and healthcare are necessities enhances the perceived unfairness of the
GRT.
·
A couple of provisions of current law
mitigate to some extent the regressive impacts of the GRT:
- Food
purchased with food stamps is exempt from the GRT. 75,000 low-income families in New
Mexico, with 195,000
persons, are food-stamp recipients. This provision excluded from tax approximately
$184 million--or about 10 percent of total food spending--of food purchases
in FY 2003.
- The
Low Income Comprehensive Tax Rebate (LICTR) is intended to offset to some
degree the regressive impacts of the GRT.
LICTR is a refundable credit of up to $450 per year for households
with income of less than $22,000.
Stability
and adequacy of state and local revenues:
·
Food expenditures historically are a very
stable component of the gross receipts tax base. Gross receipts tax collections from food help
dampen volatility of state tax revenue collections, and buttress
House Bill 625 -- Page 5
·
the
revenue base during cyclical downturns in the economy. Over the last ten years, gross receipts
·
tax
collections on food have grown at a stable 1.7% compound rate per year. This proposal would reduce projected GRT
revenue by about 7.5%, and state General Fund revenue by about 2.6%.
·
In addition to adding an element of
stability to the gross receipts tax, receipts of health practitioners grow more
quickly than general revenue. Exempting
this sector reduces the “elasticity”—the rate of growth of revenue collections
relative to the rate of economic growth--of the gross receipts tax. In other words, it makes it harder for the
tax revenues to keep up with inflation when the higher-growth sectors are
carved out of the existing tax base.
·
The broad GRT base has frequently been
cited as one reason New Mexico’s
sales tax revenue growth has been more robust than that of other states. Over the decade ending in 2002, the GRT base
grew at a 5.1% compound annual growth rate, compared with personal income
growth of 5.5% in the state. One
explanation is that the GRT’s taxation of services
prevented the erosion of the base as the economy has shifted away from manufacturing
to services.
Other
States’ Sales Tax Treatment of Food and Medical Services:
- Of
the 45 states that impose a sales or gross receipts tax, 28 have
exemptions for food. Of the 17
states that tax food, five do so at a reduced tax rate. Of the thirteen states that fully tax
food sales, seven (including New
Mexico) offer income
tax credits or rebates to offset at least part of the tax on food (see
Illustration 1, on page 6).
- According
to a recent survey by the Federation of Tax Administrators (FTA), New
Mexico is one of only
four states to tax physicians’ services.
Managed Care and Medicare Part “C”:
- Some
of the impetus behind proposals to provide deductions or exemptions to
health care practitioners stems from the fact that some health plans are said to be refusing to pay the passed-on tax. Additionally, Medicare reimbursement
rates are widely believed to be unjustly low, creating significant
economic strain on the New
Mexico healthcare
sector.
- The
1997 Balanced Budget Act expanded the types of private health care plans
that may offer Medicare benefits to include medical savings accounts,
managed care plans, and private fee-for-service plans. The new Medicare
Part C (also called Medicare+ Choice) programs are in addition to the
fee-for-service options available under Medicare Parts A and B.
Definition
of “Health Practitioner”:
Although the bill contains a fairly
comprehensive list of health practitioners that are eligible to claim
the GRT deduction, dentists do not qualify under this proposal.
Repealing
the 0.5% Municipal Credit:
·
In general, taxpayers in municipal areas
are subject to local option GRT taxes imposed by both the county and by the
municipality. Thus, combined tax rates
in municipal areas tend to be higher than those outside municipalities. Repealing the 0.5 percent credit will tend to
increase the differential between the total GRT rates imposed in cities and
total rates imposed in unincorporated areas.
Repealing the credit may provide some incentive for taxpayers to locate
businesses just outside municipal boundaries to take advantage of lower
rates. Hence, the municipal
House Bill 625 -- Page 6
·
credit
may serve to limit “urban sprawl” to some degree.
·
The effective .5% rate increase will lead
to gross receipts tax rates in some municipalities approaching 8%. The principle on which the gross receipts tax
was founded was to couple a broad base with a low rate. This proposal represents some erosion of that
principle.
Hold-Harmless
Provisions:
- The
proposed local government hold-harmless provisions introduce a significant
new layer of complication in the administration of sales taxes in the
state. If these provisions were to
pass, most future proposals for substantive GRT deductions can be expected
to contain similar stipulations, further complicating taxpayer reporting
requirements. The trend of
increasing complication in the GRT program runs counter to the nationwide
efforts to simplify sales tax administration as incorporated in the
Streamlined Sales Tax Project.
·
The local government “hold-harmless”
provisions of the bill would require that the value of the deductions claimed
be multiplied by the local option rates imposed at the time the deduction is
claimed, and the resulting amount distributed from the general fund to the
appropriate local government. Hence over
time, the negative general fund impact will increase as additional local options
are imposed. The additional revenue from
repealing the 0.5% municipal credit may not be sufficient to support the local
offset in the future.
·
The state, municipal and county offsets
are supported by a 0.5% GRT rate increase on municipal taxpayers. Effectively,
the 75% of GRT taxpayers reporting to municipal locations would bear 100% of
the additional tax burden.
·
Similarly, although the majority of the
GRT on food is assumed to be passed directly on to households, the department
estimates that only about 40% of the increased GRT due to the 0.5% credit
repeal is passed directly to households.
The remainder is imposed directly on businesses and government (although
it may be indirectly shifted to households).
The net result of this shifting is that the GRT will be less like a
retail sales tax and more like a transfer tax imposed on businesses.
BT/lg:yr
