BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  3

DATE:  March 7, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: HB –778 as amended by HBIC

SPONSOR: Representative Hobbs

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.

DESCRIPTION: This bill allows a credit against personal or corporate income tax equal to 50% (HBIC amendment) for the amounts of state and local option gross receipts tax paid on physician’s services, dentists and a long list of other health practitioners. This bill uses the personal and corporate income tax to reimburse physicians and all other health practitioners for the cost of gross receipts tax imposed on their 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          .             	
(31,000)	(34,000)	(36,300)	Recurring	General Fund	
0 	0 	0 	Recurring	Local Governments	
	4,700 	5,100 	Recurring	State Deduction Recovery	
(31,000)	(29,300)	(31,200)	Recurring	Net General Fund	
	9,400 	10,200 		Federal Deduction Recovery	
31,000	19,900 	21,000 		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 preferable administratively to any of the various credit mechanisms proposed on the gross receipts tax side for health care services.

OTHER IMPACTS AND ISSUES:
1.	A previous review of this concept characterized this as a “double dip”. For some doctors, this comment is accurate. For others, who are able to pass the gross receipts tax forward to patients, the characterization is not correct.  See OTHER IMPACTS below for an explanation of the difference.

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	(31,000)	(34,000)	(36,200)	(38,600)	(41,200)	
Local Governments	0 	0 	0 	0 	0 	
Total	(31,000)	(34,000)	(36,200)	(38,600)	(41,200)	
State Deduction Recovery		4,700 	5,100 	5,400 	5,800 	
Net General Fund	(31,000)	(29,300)	(31,100)	(33,200)	(35,400)	
Federal Deduction Recovery		9,400 	10,200 	10,800 	11,600 	
Net Taxpayer Benefit		19,900 	19,900 	22,400 	33,800 	
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.

4.	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.

5.	 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.

4.	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. 

An example may explain the somewhat arcane “double dip” concept of OTHER ISSUES AND IMPACTS, #1

The original explanation follows:

Since the bill does not account for current law, this is a “double dip”. Under current law, gross receipts taxes paid are excluded or deducted from income for the purpose of income tax. For a sole practitioner this exclusion or deduction may be worth over 60% of the amount of the gross receipts tax paid. (up to 39.6% federal marginal rate; up to 15.3% self-employment tax; and up to 8.2% state income tax rate). This credit then adds to the value of the exclusion or deduction. The deductibility of gross receipts tax is current law and does not show up in the fiscal impact above. A 50% credit, added to the value of the deduction net of deduction recovery amounts about holds most physicians harmless to the gross receipts tax imposed on physician’s services.

Consider two situations – 
	a doctor with $6,000 in GRT paid by patients or reimbursed from providers on $100K of services. The total amount collected is $106,000. The doctor may treat these reimbursements as an exclusion or a deduction. In either case, the net amount for income tax purposes is $100K, on which the doctor pays income tax at whatever rate, net of expenses, is appropriate. This appropriate rate may include self-employment taxes. The double dip comment is really not appropriate under this circumstance. The discussion of state and federal deduction recovery, however, is.

	A doctor chooses or is forced to “eat” the gross receipts tax. He collects $100K from patients, insurance carriers, Medicaid and Medicare. The amount of gross receipts tax is $5,660 determined by inverting the 6% rate (6,000  (1 + .06) * .06. The doctor then deducts this amount on schedule C of the 1040 (or equivalent line of the 1065 (partnership return), 1120 (regular corporation) or 1120S (Sub-S corporation return). When this combination of a lower gross income and deducting the amount of gross receipts tax paid, the doctor in example 2 has less income that the doctor in case 1 by the amount of the difference between the net profit, net of gross receipts tax paid, multiplied by the effective marginal rate on net income. This effective rate can be as much as 62.5%,. In effect, state and federal income taxpayers subsidize a significant portion of the doctor’s payment of gross receipts tax.

In either case, the proposed income tax credit is calculated not on the amount of gross receipts tax paid, net of income tax deduction, but on the amount actually paid. In the case of the first doctor, the income tax credit is calculated on the amount collected from patients and insurers, and the doctor pockets the amount of money collected as gross receipts tax. It is discretionary whether the doctor will adjust prices downward to accommodate the later reimbursement of gross receipts tax paid. Under most circumstances, the doctor will not adjust prices. 

In the case of the second doctor, half the amount of tax paid, plus half the amount of tax not collected from patients and insurers has already been reimbursed through the mechanism of deductability. Now the credit allows the doctor to use the $5,660 in gross receipts tax paid as a credit against state income taxes. Aside from issues of state and federal deduction recovery, this doctor also will pocket the amount of credit and end up, after taxes, substantially better off than if there were no gross receipts tax, no deduction and no credit. Again, depending on the effective tax on marginal income, this can easily be 50% of the amount of gross receipts tax paid better off.