Health care providers have long needed relief from New Mexico’s gross receipts tax. But the 2004 legislative session produced a bad law. It provided unfair relief to those involved in “managed care,” making 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.”

Introduction

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 good2.  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 tax3.  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 Albuquerque4 relative to Texas had the tax law not changed:

 

Before Tax Law Change
Total Tax Paid by Doctors and Dentists
by Taxable Income in Tax Year 2005
 
(includes federal and state income taxes and effect of the grt in NM)
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $29,292 $37,756 $46,564 $55,373 $64,376 $73,962
Texas Tax $10,800 $15,956 $21,556 $27,156 $33,006 $39,606

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 taxes5 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 feature6 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:

 

After Tax Law Change
Total Tax Paid by Managed Care Doctors and Dentists
by Taxable Income in Tax Year 2005
(includes federal and state income taxes)    
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $16,128 $22,175 $28,639 $35,103 $41,802 $49,206
After Tax Law Change
Total Tax Paid by Fee-For-Service Doctors and Dentists
by Taxable Income in Tax Year 2005
(includes federal and state income taxes and effect of the GRT in NM)
Taxable Income $100,000 $120,000 $140,000 $160,000 $180,000 $200,000
New Mexico Tax $30,378 $39,041 $48,043 $57,045 $66,238 $76,004

 

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 tax7.
  • It harms the consumer.  The greatly expanded proportion of health care delivered under managed care in New Mexico will exacerbate everything that is wrong8 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.

  1. An earlier version of this article appeared in the October 2004 edition of the New Mexico Dental Journal.
  2. The law also eliminated the tax on groceries purchased for home consumption, while raising the overall gross receipts tax rate in municipalities by 0.5 percentage points.  The part of the law is terrible too, since it will actually hurt the poor (because the tax increase far outweighs any relief from the tax on groceries).  Interested readers will find a thorough analysis of this abomination in the paper Reform This! on the Foundation’s Web site.  Also, an earlier paper “Lower Taxes Period: the right way to end the tax on food” provides additional analysis and background.
  3. Health care providers have a higher percentage of overhead than do other service providers.  Consequently they suffer more.  The percentage of overhead used for the examples in this paper is 65 percent (source Dr. David Moore 9/8/04).  Tax calculations are for couples filing jointly.
  4. Other jurisdictions (e.g. Santa Fe, Las Cruces, Taos) generally have higher gross receipts tax rates than does Albuquerque, making the adverse situation even worse.
  5. Texas has the most favorable tax climate in the region.  But the health care provider would still save over $22,000 in taxes by moving to a less favorable tax state such as Utah or Oklahoma.  The table assumes that the legislature will not renege on the scheduled reduction of the top rate on individual income to 6.0% (from 6.8% this year).
  6. A detailed discussion of qualifying managed care criteria along with examples can be found in publication FYI-202 on the website of New Mexico Taxation and Revenue Department.
  7. See the Foundation’s publication “Reform This!” for a discussion of how taxes cause harm.
  8. A detailed analysis of this assertion can be found in “Solutions to the Medicaid Crisis in New Mexico” on the Foundations website:www.riograndefoundation.org.