Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance

committees of the NM Legislature. The LFC does not assume responsibility for the accuracy of these reports

if they are used for other purposes.

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

SPONSOR Beffort

ORIGINAL DATE

LAST UPDATED

1/21/08

1/23/08 HB

SHORT TITLE Health Insurance Tax Credit

SB 39/aSCORC

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

($6,100.0)

($12,200.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to HB62, SB3, HB147, HB214, SB228, HB205

Conflicts with SB115

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of SCORC Amendment

The Senate Corporations and Transportation Committee amended SB39 to change the word

“coverage" to “insurance." The amendment does not change the fiscal impact.

Synopsis of Original Bill

Senate bill 39 creates a new credit called the “Health Insurance Tax Credit" which is a credit for

a portion of health insurance premiums paid by New Mexico residents under certain conditions.

The taxpayer must not be a dependent of another taxpayer, must not be enrolled in a Medicaid or

SCHIP program, did not claim the premium as part of federal itemized deductions or as part of

the state medical expenses deduction.

For residents who receive coverage under an employer sponsored health plan and whose

household income is less than 100 percent of the federal poverty level (FPL) and for residents

who do not have coverage under an employer-sponsored plan and whose household income is

Senate Bill 39/aSCORC – Page 2

less than 200 percent of FPL, the credit is the greater of $2,500 or 50 percent of the resident’s

contribution to health coverage. The credit is refundable so if it exceeds the taxpayer’s personal

income tax liability, the excess is refunded.

2007 Federal Poverty Level (FPL)

Family Size

100%

200%

1 10,212 20,424

2 13,692 27,384

3 17,172 34,344

4 20,652 41,304

5 24,132 48,264

6 27,612 55,224

7 31,092 62,184

8 34,572 69,144

The effective date is for tax years beginning on or after January 1, 2008.

FISCAL IMPLICATIONS

The fiscal impact could potentially be enormous because the language does not have many

restrictions as to what constitutes health insurance coverage. The numbers shown below assume

a phased-in take up rate with a maximum of 50 percent of eligible taxpayers taking the credit.

The central reason that this is so high is to address TRD’s concern that the insurance industry

will develop “empty" policies so that taxpayers can take advantage of the credit. Adding a

definition of health insurance coverage and a certification process would greatly reduce the fiscal

impact.

Fiscal Impact

Eligible

549,949

100% FPL

200% FPL All Eligible

Share Below Level

19%

10%

Population

106,140

56,095

162,235

Share currently uninsured

30%

30%

31,842

16,828

48,670

Credit

2,500

2,500

Max Credit Amount (100% take-up rate)

79,605,118

42,071,099

121,676,216

Take-up Rate

FY09

5%

6,083,811

FY10

10%

12,167,622

FY11

30%

36,502,865

FY12

50%

60,838,108

Senate Bill 39/aSCORC – Page 3

SIGNIFICANT ISSUES

Nationally, health insurance premiums grew tremendously over the last decade and though the

rate of growth has slowed in the last two years, it remains near 10 percent. That compares with

inflation at approximately 3 percent and the economy which is also growing at about 3 percent.

As the premiums increase, the number of employers offering health insurance decreases.

According to the Kaiser Family Foundation, which tracks a host of health related issues, the

percentage of employers offering health insurance has dropped from 69 percent to 60 percent in

the last few years.

Mathematica Policy Research, Inc. prepared a report for the Health Coverage for New Mexicans

Committee (HCNMC) over the last year and found that approximately 79 percent of private

sector employees in New Mexico are employed by firms that offer health insurance coverage but

just half of the employees are enrolled. Many of these may be enrolled in spouse insurance.

However, just 39 percent of small employers that employ less than 25 percent offer insurance.

The HCNMC looked at several models but did not recommend any. The executive has proposed

a plan called Health Solutions that this legislation would likely complement. Another plan, a

single payer plan, called Health Security would reform the health care delivery system so that

employers no longer provided health insurance and so this bill would conflict with that proposal.

TRD:

The bill does not define the nature of coverage required for health insurance to qualify for

the credit. This structure creates a very strong incentive for some insurance

companies to issue health insurance policies that provide only minimal coverage and

therefore carry a premium of less than $2,500. Individuals purchasing such policies

would get free health insurance, plus the excess of $2,500 over the premium in cash. The

result would be a large revenue loss to the State with very little increase in real health

insurance coverage.

The bill would provide a credit for health insurance premiums that are currently being

paid by employees. In addition, is would provide an incentive for employers who

currently require employees to pay less than $2,500 of the cost of their health insurance

premium to increase the share of the premium paid by employees. Both of these effects

increase the revenue cost of the proposal without changing the amount of health

insurance purchased.

By making the credit the greater of $2,500 or 50% of the amount an individual pays for

health insurance the bill would provide a very uneven subsidy for the purchase of health

insurance because premiums vary widely by the age, gender, and other characteristics of

an individual. Thus, the premium subsidy provided by the credit could far exceed 100%

for a young healthy male purchasing a policy with low deductibles and co-pays, but

would be limited to 50% for individuals with higher expected health expenses and

therefore higher premiums, who because of low income would likely purchase a policy

with relatively high deductibles and co-pays.

ALTERNATIVES

The bill as drafted does not define health insurance coverage which is why there is a very high

Senate Bill 39/aSCORC – Page 4

fiscal impact. One option is to require those that are eligible for Medicaid or another state

program to enroll rather than receive the credit. For this population there are several state

programs such as State Coverage Insurance (SCI).

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Bill Number Title

Brief Description

H 37 ELECTRONIC MEDICAL RECORDS ACT Requires electronic medical records

H 62 HEALTH SOLUTIONS NEW MEXICO ACT Executive proposal to create health care authority,

mandate coverage and consolidate agencies

H 147 HEALTH CARE AUTHORITY ACT

Creates a health care authority

H 182 SIMPLIFY MEDICAID ELIGIBILITY

Makes changes to determining and maintaining

Medicaid eligibility

H 205 HEALTH INSURANCE EXCHANGE ACT Creates an insurance exchange

H 214 HEALTH SECURITY ACT

Single payer s imilar to model evaluated by Health

Coverage for New Mexicans Committee

S

3 HEALTH SECURITY ACT

Single payer s imilar to model evaluated by Health

Coverage for New Mexicans Committee

S 14 HEALTH PROFESSIONAL RECRUITMENT &

RETENTION

Appropriation of 1.765 million aimed at retention

programs

S 39 HEALTH INSURANCE TAX CREDIT

Creates a credit for the provision of health

insurance

S 40 HEALTH INSURANCE IN COLLEGE

SCHOLARSHIPS

Mandates that college affordability go to student

health insurance coverage.

S 228 HEALTH INSURANCE EXCHANGE ACT Creates an insurance exchange

S 115 EMPLOYEE HEALTH INSURANCE PREMIUM

TAX CREDIT

Creates a credit for the provision of health

insurance

OTHER SUBSTANTIVE 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.

Senate Bill 39/aSCORC – Page 5

Arizona has a health insurance premium credit with a maximum amount for all credits set at $5

million and the credit is awarded on a first come, first served basis.

TECHNICAL ISSUES

TRD:

(1) Paragraph E (beginning on page 3, line 10) requires using federal poverty levels as of

December 31 of the taxable year to determine eligibility for the credit. This date is not

Senate Bill 39/aSCORC – Page 6

timely for developing programs for processing the returns, for publishing tax return

instructions, or for providing instruction to software developers who are developing

programs to prepare returns. (2) The bill would deny a credit to individuals if they take a

deduction under 7-2-35 NMSA 1978 for their premium cost, but the bill does not deny

the credit in cases where an individual claimed a medical care credit under §7-2-18.13

NMSA or an exemption under §7-2-5.9. (3) The bill limits the credit to residents, but

does not apportion or otherwise limit the credit based on the amount of time a resident is

in the State.

ADMINISTRATIVE ISSUES

TRD: The credit would be difficult to audit and have high potential for fraudulent claims. The

Department does not currently request the information about the level or nature of individuals’

health insurance coverage. The credits would be difficult to audit without more information,

which will complicate returns and increase the cost of return processing.

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