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F I S C A L I M P A C T R E P O R T

SPONSOR Smith

ORIGINAL DATE

LAST UPDATED

1/23/06

HB

SHORT TITLE Department of Health Hospital Gross Receipts

SB 207

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(11,286.0)

(12,075.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Department of Health (DOH)

SUMMARY

Synopsis of Bill

Senate Bill 207 provides a gross receipts tax credit for hospitals licensed by the Department of

Health (for-profit hospitals). For hospitals in municipalities, the credit equals 3.775 percent of

taxable gross receipts, after adjusting taxable gross receipts down by 50 percent for an existing

50 percent deduction. For hospitals in unincorporated areas of counties, the credit equals 5 per-

cent of taxable gross receipts, after adjusting taxable gross receipts down by 50 percent for an

existing 50 percent deduction.

The bill will be applicable to tax reporting periods after July 1, 2006.

FISCAL IMPLICATIONS

All of the state’s for-profit hospitals are currently located within municipal areas, where the state

tax rate is 3.775 percent. Therefore, the credit will eliminate the state gross receipts tax paid by

for-profit hospitals. The bill holds local governments harmless, so for-profit hospitals will still

pay a little over 1 percent local gross receipts tax.

Senate Bill 207 – Page

2

A New Mexico Hospital Association survey on hospital gross receipts payments for FY05 indi-

cates that for-profit hospitals paid gross receipts tax of $16.4 million, of which about $9.9 mil-

lion went to the state. Assuming that the impacted tax base will grow by 7 percent in FY06 and

FY07, the credit will reduce general fund revenue by about $11.3 million in FY07 and $12.1 mil-

lion in FY08.

SIGNIFICANT ISSUES

The bill effectively reduces the gross receipts tax paid by for-profit hospitals from 50 percent of

the normal state rate to nothing.

About half of New Mexico’s 42 hospitals are for-profit. For-profit hospitals compete with non-

profit hospitals in New Mexico and hospitals in neighboring states that do not pay gross re-

ceipts tax. The New Mexico Hospital Association reports that this bill will remove a competitive

disadvantage against New Mexico’s for-profit hospitals.

According to the NMHA, rural hospitals have no choice but to absorb the costs of uncompen-

sated care for patients who cannot pay. In addition, it is difficult for for-profit hospitals to pass

gross receipts tax on to consumers because Medicare will not reimburse for it.

DOH believes removing the gross receipts tax from for-profit hospitals will make them more

profitable and could allow them to provide enhanced services in New Mexico.

The proportion of for-profit hospitals has increased over last few years because for-profit hospi-

tals have more access to capital.

ADMINISTRATIVE IMPLICATIONS

TRD reports they will experience moderate administration impacts due to this bill. TRD will

need to revise forms, educate taxpayers, train personnel, and modify audit processes.

TECHNICAL ISSUES

TRD notes that the credit could be taken by hospitals after the deduction in Section 7-9-73.1

NMSA 1978, but it is unclear if the credit could be taken before or after the deduction in Section

7-9-93 NMSA 1978. A taxpayer may be able to claim the credit for receipts that are also eligible

for the deduction in Section 7-9-93 NMSA 1978. TRD suggests amending page 2, lines 10-11

and 15-16 to read “after all applicable deductions have been taken.”

OTHER SUBSTANTIVE ISSUES

TRD noted that receipts from the health industry have historically grown more quickly than gen-

eral revenue. Deducting services from high-growth sectors such as health care from the existing

tax base makes it harder for tax revenue growth to keep pace with inflation.

Senate Bill 207 – Page

3

POSSIBLE QUESTIONS

In December 2005, NMHA told the Revenue Stabilization and Tax Policy Committee that there

is a trend of hospitals converting from non-profit to for-profit because for-profit hospitals have

better access to capital. Hospitals that have converted tend to be older, smaller facilities in small

communities that cannot afford to make improvements through bond issuances or other financing

sources. Does better access to capital give for-profit hospitals a competitive advantage over non-

profit hospitals.

SS/nt