BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 16, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: HB -745

SPONSOR: Representative Silva

BILL SHORT TITLE: Providing a Personal Income Tax or Corporate Income Tax Credit for Amounts of Gross Receipts Tax Paid on the Provision of Physician’s Services.

CONFLICTS, DUPLICATES, COMPANIONS: SB-568 is identical. This bill uses the personal and corporate income tax to reimburse physicians for the cost of gross receipts tax imposed on their services. An almost complete listing of other bills that rebate, refund, credit or repeal the gross receipts tax on healthcare services of various classifications is given in the review of HB – 370.

DESCRIPTION: 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 on physician’s services. 

EFFECTIVE DATE: applicable for tax years beginning on or after January 1, 2001

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:

		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
 FY 2002 	FY 2003	FY 2004   	     Impact     t     	             Affected          .             	
(42,000)	(45,900)	(49,000)	Recurring	General Fund	
0	0	0	Recurring	Local Governments	
(42,000)	(45,900)	(49,000)	Recurring	General Fund	
	3,200	3,400	Recurring	State Deduction Recovery	
	(42,700)	(45,600)	Recurring	Net General Fund	
	12,800	13,600		Federal Deduction Recovery	
	29,900	32,000		Net Taxpayer Benefit	

ADMINISTRATIVE IMPACT: minimal. Forms and instructions will have to reflect this change, as will taxpayer seminar materials. Audit will be very simple, merely requiring the credit amount on personal income tax to be compared to gross receipts tax paid. Note that this bill concept is vastly administratively to any of the various credit mechanisms proposed on the gross receipts tax side for health care services.

OTHER IMPACTS AND ISSUES:
1.	Looked at strictly from an income tax point of view this is a “double dip”. Under current law, gross receipts taxes paid are excluded or deducted from income for the purpose of income tax. This credit then adds to the value of the exclusion or deduction.   Since in this case the income tax system is simply a device to return gross receipts taxes paid, that argument loses force.  

2.	The Department does not have any information on the status or income distribution for physicians, hence has been unable to prepare the usual detail charts. It is a reasonable assumption, however, that physicians are mostly married and mostly in the > $75,000 taxable income category.

3.	Five-year impact:
	FY 2002	FY 2003	FY 2004	FY 2005	FY 2006	
General Fund	(42,000)	(45,900)	(49,000)	(52,300)	(55,800)	
Local Governments	0	0	0	0	0	
Total	(42,000)	(45,900)	(49,000)	(52,300)	(55,800)	
State Deduction Recovery		3,200	3,400	3,700	3,900	
Net General Fund		(42,700)	(45,600)	(48,600)	(51,900)	
Federal Deduction Recovery		12,800	13,600	14,800	15,600	
Net Taxpayer Benefit		29,900	32,000	33,800	36,300	

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 the companion gross receipts tax  repealers. 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 number were generated from the same base, net of Medicare B deduction.

4.	The clear design premise of this bill is to isolate local governments from the decision at the state level to repeal the gross receipts tax on physician’s services. In this respect, the bill is successful. There is no local government revenue impact from this bill.

5.	It has been pointed out that 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.