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

SPONSOR Snyder

ORIGINAL DATE

LAST UPDATED

1/26/06

2/2/06 HB

SHORT TITLE Employee Health Insurance Tax Credit

SB 345/aSCORC

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(25,000.0)

(50,000.0)

(50,000.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Kaiser Family Foundation (KFF)

Response Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of SCORC Amendment

The Senate Corporations and Transportation Committee amended Senate Bill 345 by allowing

long care and disability premiums to be eligible for the credit. This amendment does not change

the fiscal impact of the original bill.

Synopsis of Original Bill

Senate Bill 345 amends the Income Tax Act and the Corporate Income and Franchise Tax Act by

providing a credit for employers with 50 or less employees who provide health insurance to their

employees. The credit is for 50 percent of the premiums paid by the employer for the employ-

ees’ health care. The credit is available for the first five years the employer provides health in-

surance.

Senate Bill 345/aSCORC – Page

2

FISCAL IMPLICATIONS

There are approximately 39,000 businesses in New Mexico with fewer than 50 employees. Us-

ing a calculator provided by TRD, the population expected to be covered is 225,074.

Average family health insurance costs $9,299 per year per family, $6,401 for a couple and

$3,361 for a single. Using these assumptions, a 50% credit on the employer’s portion of the in-

surance premium, which ranges from 73 percent to 80 percent, is expected to reduce personal

income tax revenues by $500 million per year. However, the credit is not refundable and so is

limited to actual liability.

TRD maximum tax liability to be approximately $50 million per year using ratios derived from

IRS Statistics of Income for personal and corporate income tax returns and a 5 percent effective

tax rate. In FY06, the impact would be half of this amount assuming the tax year is evenly di-

vided amongst fiscal years.

SIGNIFICANT ISSUES

Nationally, health insurance premiums grew tremendously over the last decade and though the

rate of growth has slowed in the last two years, it remains near 10 percent. That compares with

inflation at approximately 3 percent and the economy which is also growing at about 3 percent.

As the premiums increase, the number of employers offering health insurance decreases. Ac-

cording to the Kaiser Family Foundation, which tracks a host of health related issues, the per-

centage of employers offering health insurance has dropped from 69 percent to 60 percent in the

last few years.

In NM, affordable health insurance is more of a problem than nationally. The burden of provid-

ing health care access has shifted from the employer to the government, particularly for children

whose parents cannot get health insurance at work. States have recently been trying to reverse

that and one way is to offer tax incentives that encourage employers to provide access to health

insurance. However, the cost of health insurance is still an insurmountable obstacle for many

smaller businesses and if they provide it they have to pass on a significant share of the premium

to the employee.

TECHNICAL ISSUES

TRD:

The rate of credit under the bill is made conditional on the time period during which an employer has

been providing insurance to their employees. It is unclear from this language how the statute would

apply to taxpayers currently paying employee health insurance premiums. The options are: the five-

year period could begin with the effective date of the bill, or with the point in time when an employer

first provided insurance, even if that was at some time in the past. If employers currently offering in-

surance are not allowed the higher rate of credit, they have an incentive to cease paying premiums for

some time period in order to qualify for credits during the first five years in which they resume paying

premiums.

The bill would create an incentive for a “taxpayer” with more than 50 employees to break up into sev-

eral “taxpayers” in order to claim the credit. To limit tax avoidance through this mechanism, the pro-

posal should contain additional language requiring that all related entities are to be counted as part of

the same “taxpayer” for purposes of the bill.

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