NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

Only the most recent FIR version, excluding attachments, is available on the Intranet. Previously issued FIRs and attachments may be obtained from the LFC office in Suite 101 of the State Capitol Building North.

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to Senate Bill 5, Senate Bill 191, Senate Bill 195, House Bill 94, House Bill 202, House Bill 227, House Bill 253, House Bill 326 & others.

SOURCES OF INFORMATION

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

This bill allows a dollar for dollar credit against personal or corporate income tax for the amounts of state and local option gross receipts tax paid by physicians, dentists, dental hygienists, osteopaths, doctors of oriental medicine, podiatrists, optometrists, psychologists, registered and practical nurses, midwives, physical and occupational therapists, and respiratory care practitioners.

Significant Issues

Under current law, gross receipts taxes paid are excluded or deducted from income for the purpose of income tax.

FISCAL IMPLICATIONS

The Taxation and Revenue Department report that this bill would reduce the general fund by $62 million in FY02 and hold local governments harmless.

The Taxation and Revenue Department (TRD) provided the following five year estimate and explanation of the State and Federal Deduction Recovery.

Note that by the fifth year, taxpayer benefit is about 70% of the net general fund cost. The difference is the amount transferred to the federal treasury through the action of deducting state taxes.

Note also that the amounts reported here seem a little less than for some of the other healthcare bills introduced this session. The difference is that tax year 2001 gross receipts taxes paid are claimed as credit on income tax returns filed in the spring of 2002, with substantial amounts not claimed until the fall of 2002, which is well into fiscal year 2003. The numbers were generated from the same base, net of Medicare B deduction.

High-income taxpayers must deal with two requirements lower income taxpayers avoid. These issues probably affect the calculation of "federal deduction recovery" reported in the fiscal impact. The first of these is the federal alternative minimum tax. State income taxes are a preference item for AMT purposes. Under some circumstances, then, the decrease in state taxes can cause a decrease the following year in federal taxes for taxpayers subject to the AMT. Since IRS/SOI does not list number of taxpayers or amount of AMT, there is really no feasible means of adjusting the models for this effect. This AMT issue does not affect the amount of "state deduction recovery", however, but does affect the calculation of "federal deduction recovery". The second adjustment is the phase-down of itemized deductions, again for high-income taxpayers. High income taxpayers must reduce total deductions claimed by 3% of the excess of income over a threshold amount for AGI (about $129,000 for married filing joint in 2000; $133,000 for 2001). For the purpose of this discussion, however, the subtraction is a function of income, not deductions. The rough calculation of state and federal deduction recovery is really not altered as to inclusion or exclusion in income, but the rate assumed for federal deduction recovery is the ordinary income tax rates unadjusted for the loss of a portion of deductions. This means that "federal deduction recovery" is likely to be overstated for high income taxpayers.

JBE/ar