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 HTML & Adobe PDF formats) are a vailable on the NM Legislative Website (legis.state.nm.us).

Adobe PDF versions include all attachments, whereas HTML versions may not. Previously issued FIRs and

attachments may 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 Papen

DATE TYPED 03/18/05 HB

SHORT TITLE Nursing Home Receipt Gross Receipts

SB

534/a SCORC/a

HFL#1/a HTRC

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

$1,600.0

$3,200.0

Increasing Recurring General Fund (Per-

sonal Income Tax)

($200.5)

($802.0)

Increasing Recurring

General Fund

(GRT)

($133.8)

($535.0)

Increasing Recurring Local Governments

(GRT)

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to SB 401, HB 446, and SB 73

Responses Received From

Taxation and Revenue Department (TRD)

Human Services Department (HSD) (for bill as amended by SCORC)

Department of Finance (DFA) (for bill as amended by SCORC)

SUMMARY

Synopsis of HTRC Amendment to Senate Bill 534

Senate Bill 534 has been amended by the House Taxation and Revenue Committee (HTRC).

The amendment would strike the House Floor # 1 amendment, which struck all three of the Sen-

ate Corporations and Transportation Committee (SCORC) amendments. The HTRC amendment

effectively leaves the bill in its original version, as amended by SCORC. See the “Synopsis of

SCORC Amendments to Senate Bill 534” for an analysis of this version of the bill.

Synopsis of House Floor #1 Amendment to Senate Bill 534

Senate Bill 534, as amended by SCORC, was amended by the House Floor. The amendment

struck all three of the SCORC amendments described below, taking the bill back to the originally

proposed bill, which provides a gross receipts tax deduction for nursing home receipts for the

provision of medical services to Medicare beneficiaries. The effective date of the provisions of

the bill, as reinstated by the House Floor Amendment is July 1, 2005. See the “Synopsis of

Senate Bill 534/aSCORC/aHFL#1/aHTRC -- Page 2

Original Bill” below.

Synopsis of SCORC Amendments to Senate Bill 534

Senate Bill 534 was amended by the Senate Corporations and Transportation Committee. The

amended Senate Bill 534 would repeal Section 7-2-18.12 NMSA 1978, passed during the 2004

legislative session, which currently provides an income tax credit of up to $10 per day to taxpay-

ers for out-of-pocket expenses for nursing home services. Additionally, the amendment would

eliminate the effective date of July 1, 2005 included in the original bill and would invoke an

emergency clause, so that the provisions of the bill take effect immediately.

Synopsis of Original Bill

Senate Bill 534, as originally proposed, would provide a gross receipts tax deduction for nursing

home receipts for the provision of medical services to Medicare beneficiaries. Eligible receipts

must come from the U.S. government or any agency thereof for services pursuant to the provi-

sions of Title 18 of the federal Social Security Act. The bill would also codify a section of law

passed in the 2003 legislative session, which made Medicare receipts of clinical laboratories and

home health agencies deductible.

Significant Issues

With respect to the SCORC amendments, HSD noted that the repeal of the income tax credit in

the amended bill was necessary to avoid a disallowance of approximately $15 to $17 million in

federal funds. They note that the Centers for Medicaid Services (CMS), the federal agency re-

sponsible for oversight of the Medicaid program, has determined that the long term care bed sur-

charge is impermissible due to the existence of the out of pocket income tax credit. CMS report-

edly stated that they will disallow the federal revenue associated with the surcharge if the income

tax credit is not repealed. HSD notes that the bed surcharge is expected to generate approxi-

mately $20 million in revenue for the state.

DFA cautioned that the amendments to the bill would effectively remove the bed tax money

from the Federal Government while having private-pay individuals in long term care pay the bed

tax out of pocket. They note that, according to HSD's estimate in the 2004 session, approxi-

mately 600 individuals in nursing homes, institutions for mentally retarded and long term care

facilities will pay bed tax of about $3,150 per year ($8.63 per day times 365 days per year).

PERFORMANCE IMPLICATIONS

In the event of lost revenues associated with the disallowance of federal funds (explained above),

HSD notes that it would need to implement significant cost containment measures for FY05 and

beyond. These measures would likely include reductions to provider rates and benefits.

FISCAL IMPLICATIONS

Fiscal Implications of House Taxation and Revenue Amendment

See the discussion under “Fiscal Implications of SCORC Amended Bill” for the fiscal impact.

Senate Bill 534/aSCORC/aHFL#1/aHTRC -- Page 3

Fiscal Implications of House Floor Amendments

The House floor amendment eliminated the repeal of the income tax credit, leaving only the im-

pact associated with the gross receipts tax deduction for nursing home receipts for the provision

of medical services to Medicare beneficiaries. TRD has updated the fiscal impact estimate for

this deduction to reflect new information received from the Human Services Department.

TRD reports that Medicare pays for about 508 nursing home bed in the state. They assume that

on average 90 percent of these beds are occupied and that the average annual cost of a nursing

home bed is $45 thousand. Thus, the tax base is $20.5 million (508 beds X 90% X $45,000).

Applying the statewide average gross receipts tax rate of 6.6 against the base implies a $1.36

million revenue loss. Sixty percent of this, or $802 thousand, is the revenue loss to the general

fund; the remainder is a revenue loss to local governments.

Fiscal Implications of SCORC Amended Bill

The SCORC amendments to the bill would alter the fiscal impact by repealing the income tax

credit and therefore would have had a positive net impact on the general fund of approximately

$2.4 million. The full-year fiscal impact of the bill as amended by SCORC was estimated by

TRD and HSD as follows: personal income tax revenues would have increased by $3.2 million;

gross receipts tax (GRT) revenue would decrease by $1.36 million. The GRT decrease is split

between the state and local governments, with the state absorbing approximately -$802 thousand

of the decrease.

Gross Receipts Tax Credit

According to the revised TRD analysis, which is based on new data received by HSD, Medicare

pays for about 508 nursing home beds in the State. With a ninety percent occupancy level and

an annual cost of $45,000 a year for each bed, the total tax base is $20.5 million. Gross Receipts

tax deduction for Medicare-reimbursed nursing home payments will reduce state and local reve-

nue by $1.337 million per year. Sixty percent of this impact, or $802 thousand, would be on

state revenue and the remainder on local revenue. Due to the emergency clause, TRD notes that

the gross receipts fiscal in impact FY05 would be only 25 percent of the full-year impact.

TRD believes that there is no fiscal impact associated with the provision for clinical laboratories

and home health agencies because the department is currently honoring the deductions for clini-

cal laboratories and home health agencies as passed in Laws 2003 Chapter 350. See the discus-

sion under ”OTHER IMPACTS AND ISSUES” for a further explanation of this issue.

Repeal of Income Tax Credit

According to information provided by the HSD, there are 1,089 nursing home beds paid for pri-

vately in the state. Assuming an average 90 percent occupancy rate for all facilities suggests

roughly 980 people are in private-pay beds. According to national information published by the

Centers for Medicaid and Medicare, about 10 percent of privately financed nursing home beds

are paid for through long-term care insurance. Thus the base for the tax credit is 1,089 * .9 * .9 *

365 * $10 = $3.2 million. Fiscal impacts of the credit repeal assume that the repeal is effective

for tax year 2005 and after. Under the State’s accrual method of accounting, one-half of the tax

year 2005 impacts accrue in Fiscal Year 2005.

Senate Bill 534/aSCORC/aHFL#1/aHTRC -- Page 4

Information provided by HSD suggests that the estimate in the table may under-state the full fis-

cal impacts of the income tax credit on the state. The reason is that some nursing home patients

who pay for their care with Social Security benefits would be eligible for the credit but would

not be included in the “private pay” tax base that was used for the estimate. TRD does not have

information on the extent of this subset of the market at this time, but it could be significant.

Thus, the fiscal impacts of the credit shown in the table are likely to be a minimum estimate of

the full impacts.

Fiscal Implications of Original bill

The fiscal impact of the originally proposed bill was originally estimated is -$1.8 million in

FY06, -$1.08 million of which will impact the general fund and -$720.0 of which will impact

local governments. The estimate is based on the number of Medicare bed days (118,728) times

the average Medicare rate ($227.5) times the average gross receipts rate (6.7 percent). Due to

the emergency clause, TRD notes that the fiscal in impact FY05 would be only 25 percent of the

full-year impact, or $450 thousand. This estimate has since been revised and is reflected above.

ADMINISTRATIVE IMPLICATIONS

If the bill passes, TRD notes that system coding and troubleshooting must be performed; forms

and instructions must be revised; taxpayer education materials and instruction publications must

be prepared; and personnel must be trained. These can be implemented with existing resources.

OTHER IMPACTS AND ISSUES

TRD highlighted the following issue:

Laws 2003, Chapter 350, Section 1 amended the deduction under Section 7-9-77.1 NMSA 1978

to include Medicare receipts of home health agencies and clinical laboratories. However, be-

cause Laws 2003, Chapter 351, Section 1, which also amended Section 7-9-77.1, was signed last

by the Governor, it was codified, while Laws 2003, Chapter 350, Section 1 (deduction for clini-

cal labs and home agencies) appears in the annotations to that section. The Tax Department in-

terprets the annotations of the statute to be binding as law until and unless they are omitted in a

subsequent amendment of the statute. The Department’s position is based on the argument that

rules of statutory construction are only aids when interpreting true legislative intent (Quintana v.

New Mexico Dep’t of Cors., 100 N.M. 224, P2d 1101 [1983]).

OPJ/sb:lg