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

SPONSOR Varela

ORIGINAL DATE

LAST UPDATED

1/22/07

HB 23

SHORT TITLE Gross Receipts Credit for Certain Hospitals

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

(7,544.4)

(16,593.4) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates Senate Bill 161

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Health (DOH)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 23 provides a gross receipts tax credit for hospitals licensed by the Department of

Health (for-profit hospitals). The credit equals one half of the state gross receipts tax rate in

FY08 and the entire state gross receipts tax rate in FY09 and beyond.

The bill will be applicable to tax reporting periods after July 1, 2007.

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 once it is fully phased in. The bill does not apply to local option gross re-

ceipts taxes, so for-profit hospitals will still pay a little over 1 percent local gross receipts tax.

House Bill 23 – Page

2

A New Mexico Hospital Association survey on hospital gross receipts indicates that for-profit

hospitals paid gross receipts tax of $16.5 million in FY05 and $21.4 million in FY06, of which

60 percent went to the state and 40 percent went to local governments. Assuming that the im-

pacted tax base will grow by 10 percent each year, the credit will reduce general fund revenue by

about $7,544.4 thousand in FY08 and $16,593.4 thousand once it is fully phased-in in FY09.

SIGNIFICANT ISSUES

Under current law, for-profit hospitals qualify for a 50 gross receipts tax deduction (Section 7-9-

73.1 NMSA 1978). The bill effectively reduces the gross receipts tax paid by for-profit hospitals

from 50 percent of the normal state rate to nothing once it is fully phased-in in FY09.

About half of New Mexico’s 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.

LFC notes that receipts of health practitioners have historically grown faster than receipts of

other industries. Removing receipts from high-growth sectors from the gross receipts tax base

makes it more difficult for tax revenue to keep pace with inflation.

ADMINISTRATIVE IMPLICATIONS

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

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

process the credit.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Duplicates Senate Bill 161.

TECHNICAL ISSUES

TRD notes the purpose of Section 1 of the bill is unclear. It appears possible that the language

was intended to clarify that TRD should reduce the distributions to the general fund to prevent

revenue impacts to local governments. If that is the intention of the sponsors, TRD recommends

amending Section 1 to state “Distributions from the tax administration suspense fund to the state

general fund of net revenue attributable to the gross receipts tax ..."

House Bill 23 – Page

3

SS/sb