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Rio Grande Foundation
P.O. Box 2015 Tijeras, NM 87059
505-286-2030

Treat Sick Tax Policy:
First, Undo the Harm from 2004 Legislature

by Harry Messenheimer, Ph.D.
January 9, 2005

Introduction^[1]

Health care providers have long needed relief from New Mexico’s gross receipts tax.  But the 2004 legislative session produced a bad law.  While it provides relief to those involved in “managed care,” it makes matters worse for those engaged in traditional fee-for-service care.  Moreover, it will result in harm to the economy, hurt the consumer and worsen the health care “crisis.”  This paper summarizes the need for tax relief.  Then it discusses the results of the law, and why the bad aspects of the law far outweigh the good^[2].  It concludes with some recommendations that would reduce the harm.

The need for tax relief

New Mexico’s gross receipts tax has imposed an excessive burden on firms providing services.  Health care providers are particularly hard hit by the tax because of high overhead costs, all subject to the tax^[3].  Since no other state in the region taxes services, the gross receipts tax has induced dentists and doctors to leave New Mexico.  The following table summarizes the adverse situation faced by doctors and dentists in Albuquerque^[4] relative to Texas had the tax law not changed:

You can easily see the incentive for doctors and dentists to leave New Mexico.  For example, a dentist earning taxable income of $160,000 would save over $28,000 in taxes^[5] simply by moving to Texas! 

How the new law changes things

Beginning in 2005 managed care practices will no longer be subject to the tax. Unfortunately, however, traditional care doctors and dentists will see their tax rates go up!  The basic feature^[6] of “managed care” is that “providers must supply health care services to enrollees on a contract basis.”  However, copays, coinsurance and deductibles are subject to the tax even under managed care contracts.  The following table summarizes the new situation for each group in Albuquerque:

What is wrong with the new law?

• It is grossly unfair.  Why should the state favor “managed care” over traditional care?  Notice from the table above that “managed care” doctors and dentists pay almost $18,000 less in taxes than traditional care doctors and dentists for taxable income of $160,000.  A dentist or physician engaging in traditional care will have incentive to increase the proportion of her practice fitting the managed care criteria.  To break even net-of-taxes a health care provider must charge 25 percent more for the same procedure under traditional care than she would under managed care.  For example, a dentist filling a tooth for $100 under managed care would have to charge $125 under traditional care.  In each case the dentist would receive roughly $68 net of taxes.  The government simply has no business legislating such favoritism. 
• It penalizes responsible behavior.  New Mexico penalizes people who self-insure or are willing to pay high deductibles, coinsurance or copays?  This is the kind of personal responsibility the government should encourage, not penalize. 
• It will harm the economy.  The one-half percentage point increase in the gross receipts tax rate will affect firms and consumers throughout New Mexico.  Since tax harms tend to go up exponentially, the damage done will be far more than double the roughly 8% increase in the tax^[7]. 
• It harms the consumer.  The greatly expanded proportion of health care delivered under managed care in New Mexico will exacerbate everything that is wrong^[8] with health care – more government price controls and mandates, encouragement of bad principles of insurance, increasing the incentives of patients to overconsume when somebody else is paying the bill, more decision making by managed care “gatekeepers” (rather than individuals in consultation with their physician or dentist) and much less incentive to take advantage of the new, market-friendly Health Care Savings Accounts.  It is difficult to understand how such a bad law could be passed; perhaps the Medicaid crisis tail (and all its managed care interests and advocates) is now wagging the tax policy dog.  And it may be a not-so-subtle policy shift that gains momentum for socialized health care in New Mexico.
• It is an administrative nightmare.  The complex law requires additional record keeping to justify the gross receipts tax exemption.  Penalties are substantial for those who make errors.

This bad law should be rescinded in the next legislative session.  And it should be replaced with a law that is fair, consumer friendly, helps the economy and provides tax relief to health care providers.  This can be accomplished by an across the board gross receipts tax rate reduction (my favorite), a tax rate reduction for all services or a tax rate reduction only for health care providers.