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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 8/16/08 HB

SHORT TITLE Employer Health Insurance Premium Tax Credit

SB 25

ANALYST Gutierrez

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY09

FY10

FY11

(92,396.0)

(68,695.0)

(75,338.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department

Responses Received From

Taxation and Revenue Department

Human Services Department (HSD) response to SB113 in 2008 Session

SUMMARY

Synopsis of Bill

Senate Bill 25 would allow personal and corporate income tax credits for individuals owning

New Mexico businesses that provide health insurance to their employees. Premiums paid for

long-term care and disability income insurance policies would also be eligible for the credit. The

credit would total 50 percent of the cost of providing health insurance in each of the first five

years during which taxpayers pay employee health insurance, and 35 percent of the cost of

insurance premiums in a tax year that is not one of the first five years in which the employer

pays employee health insurance premiums. To qualify for the credit, employers must employ an

average of 50 or fewer employees during the tax year in which the credits are claimed. The credit

would not be refundable, and would only be allowed for the tax year in which the credits are

claimed, i.e., they could not be carried forward when taxpayers report insufficient tax obligations

against which to claim them.

FISCAL IMPLICATIONS

According to TRD, impacts were estimated using information from the Medical Expenditure

Panel Survey for New Mexico. According to the data the employers contribute about 80% of

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2

health insurance premiums. The average premium per employee is estimated to be approximately

$4,600 for FY 2005. We assume a premium growth rate of 8% to estimate the premiums for the

subsequent years.

Estimated Revenue Impact*

FY2009 FY2010 FY2011 FY2012 FY2013 FY 09-13

R or

NR**

Fund(s) Affected

(92,396) (68,695) (75,338) (82,586) (90,531) (409,545) R

General Fund

* In thousands of dollars. Parentheses ( ) indicate a revenue loss.

** Recurring (R) or Non-Recurring (NR).

Source: Taxation and Revenue Department

The data indicates that 36.4% of the firms employing 50 or less employees provide health

insurance. Out of the employees in these firms, 55.7% enroll in health insurance. Bureau of

Business and Economic Research (BBER) at UNM forecasts the growth rates of employment

used to calculate the fiscal impact. Credit allowed for currently participating employees is

assumed to be at 35% rate and credit allowed for the employee uptake is assumed to be at 50%

rate in order to estimate the calendar year impact shown in table below. To calculate the Fiscal

Year impacts, the tax year 2008 liability changes were assumed to affect only FY2009 revenues.

Tax year 2009 and subsequent year changes in liabilities were assumed to be evenly split across

the two fiscal years included in the calendar year.

Year

FY09

FY10

FY11

FY12

FY13

Premium/employee

$6,275

$6,777

$7,319

$7,904

$8,536

Number of Employees

207,385

210,704

213,864

217,072

220,328

Participating Employees

41,931

42,602

43,241

43,890

44,548

Employee Uptake

12,409

12,608

12,797

12,989

13,183

Credit Allowed (thousands)

$131,016 $143,762 $157,592

$172,752

$189,371

Credit Taken (thousands)

$65,508

$71,881

$78,796

$86,376

$94,685

Fiscal Year Estimates

(thousands)

$92,396

$68,695

$75,338

$82,586

$90,531

Source: Taxation and Revenue Department

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 insurance 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. Note that the revenue estimates

assume that the rule is a five-year lock back period.

The portion of the premium that qualifies for the credit should be more clearly specified to be

only the portion paid by the employer.

The bill would create an incentive for an employer with more than 50 employees to break up into

Senate Bill 25 – Page

3

several businesses in order to claim the credit. To limit tax avoidance through this mechanism,

the proposal should contain additional language requiring that all related entities are to be

counted as a single taxpayer for purposes of the bill.

The credit is not limited to New Mexico employees. Therefore, a qualifying business that

purchases health insurance for employees in other states could receive a credit of up to 50

percent for the health insurance expenses of their out-of-state employees.

The bill should specify that the credit reduces the deductions allowed to the employer for their

contributions to employer health insurance premium for employees.

SIGNIFICANT ISSUES

The importance of health care coverage in New Mexico cannot be understated. Other than

Texas, no other state has a higher percentage of uninsured than New Mexico. The chart below

shows the state rankings.

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ADMINISTRATIVE IMPLICATIONS

Provisions of the proposed legislation would generate moderate impacts on the Taxation and

Revenue Department. The new non-refundable tax credit will require modifications to the

personal income tax and corporate returns, instructions and publications. Depending on the

population base, it might require 1/2 FTE to manually track the credit at a cost of $15,000. A

claim form will need to be developed at a cost of approximately $1000. Audit procedures would

also need to be developed. Most implementation needs can be accomplished during the annual

revision of the PIT and CIT programs at minimal cost.

BLG/mt