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

SPONSOR Papen

ORIGINAL DATE

LAST UPDATED

1/26/07

2/13/07 HB

SHORT TITLE Hospital Gross Receipts Credit

SB 326/aSCORC

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($5,034.9)

($11,120.8) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates HB 524

Relates to HB 23 and SB 161

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Health (DOH)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of SCORC Amendment

The Senate Corporations and Transportation Committee amendment to Senate Bill 326 clarifies

language in Section 1 based on a suggestion made by TRD. The amendment does not affect the

bill’s fiscal impact.

Synopsis of Original Bill

Senate Bill 326 provides a gross receipts tax credit for hospitals licensed by the Department of

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

FY08, two-thirds of state gross receipts tax in FY09, and the entire state gross receipts tax rate in

FY10 and beyond.

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

Senate Bill 326/aSCONC – Page

2

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

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

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

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

by about $5,034.9 thousand in FY08, $11,120.8 thousand in FY09, and $18,252.7 thousand once

it is fully phased-in in FY10.

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 FY10.

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 receipts 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 uncompensated

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 hospitals

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

Senate Bill 326 duplicates House Bill 524.

Senate Bill 326 relates to House Bill 23 and Senate Bill 161. These two bills are the same as

Senate Bill 326/aSCONC – Page

3

Senate Bill 326 except they phase in the new gross receipts tax deduction in two years instead of

three.

TECHNICAL ISSUES

TRD noted that in the original bill the purpose of Section 1 of the bill was unclear. The Senate

Corporations and Transportation Committee amendment to the bill addressed this concern.

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 ..."

SS/csd:nt