BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 23, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SPAC Substitute for SB -195

SPONSOR: Senator Altamirano

BILL SHORT TITLE: Medicare B Gross Receipts Exemption for Podiatrists, Physician Payments from Medicare B.

CONFLICTS, DUPLICATES, COMPANIONS: 

DESCRIPTION: The original bill extended 1998’s Medicare B deduction for doctors and osteopaths and 2000’s expansion to Medicare B receipts of hospices to podiatrists. This SPAC substitute bill, however, converts the deduction for all three categories – physicians and osteopathic physicians, hospices and podiatrists – to an exemption. This creates a big problem for the doctors, hospices and podiatrists – see TECHNICAL ISSUES below.

EFFECTIVE DATE: July 1, 2001

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

		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
	 FY 2002 	Full Year	     Impact     t     	             Affected          .             	
	(74)	(81)	Recurring	General Fund	
	(53)	(58)	Recurring	Local Governments	

1997 Census of Healthcare Industries reports 45 podiatrists establishments with 162 employees and $10,968,000 in sales. Assume 20% growth from 1997 to FY 2002 and 17.8% of receipts derived from Medicare. This is the fraction for all doctors and related specialties. Further assume that 90% of podiatrists are located in municipalities.

ADMINISTRATIVE IMPACT: The original bill created minimal impact -- forms and instructions, taxpayer seminar materials and technical advice memoranda and training for auditors, which could all be accomplished with existing resources. The change from a deduction to an exemption, however, creates large problems for the Department and even greater problems for  taxpayers. See TECHNICAL ISSUES below for an explanation.

TECHNICAL ISSUES:
1.	The apparent purpose of the SPAC substitute bill which changes a deduction into an exemption is to relieve doctors, hospices and podiatrists from the paperwork problem of reporting the receipts only to deduct them. However, two things should be noted. Even for hospices, Medicare B receipts are only a portion of the receipts of these entities. The entities will have to separate out exempt receipts from taxable receipts, and report taxable receipts (without deductions) on a monthly basis. Thus, no paperwork is saved by the SPAC proposal.

2.	Secondly, the Department routinely compares personal and corporate income tax returns with gross receipts tax returns. In the situation where a substantial portion of total receipts are derived from Medicare B, the Department will detect a discrepancy between the amount of receipts reported on the Form 1040, Schedule C (or corporate return) and the sum of gross receipts reported on the CRS-1. (An exemption is not reported on CRS-1, where a deduction shows as total receipts less the allowed deductions). The doctor, hospice or  podiatrist then has a short period of time to explain the discrepancy or the Department will issue an assessment and undertake collection action. This will be an annual hassle.
3.	If the change to an exemption from a deduction created some paperwork savings, the exemption might be justified. In this case, however, for the vast majority of taxpayers, this change will have exactly the opposite effect as intended. Rather than easing the “empty” paperwork burden, it magnifies it several fold.
4.	Perhaps of note only to purists, gross receipts tax exemptions are compiled from 7-9-12 NMSA 1978 to 7-9-41 NMSA 1978. By exchanging “exemption” for “deduction”, but not recompiling within the correct series, this exemption will be difficult to find and therefore confusing for both Department auditors and taxpayers. Confusion is never good in tax law.

OTHER ISSUES AND IMPACTS:
1.	This continues a trend over the last decade of removing medical and hospital services from the gross receipts base. Arguments justifying 1998’s deduction for doctors and osteopaths surely apply to the services of podiatrists. Although the fiscal estimate assumes 17.8% of podiatrist’s receipts are derived from Medicare, the actual percentage might be higher.
2.	If converting a deduction into an exemption is good for certain medical practitioners, why isn’t it good for everybody? 
3.	Reporting of deductions gives the Department information to match with other sources to determine roughly whether reported gross receipts is in line with what is known elsewhere. This sort of macro-level compliance activity reduces the need for actual audits of taxpayers. Ensuring the same level of compliance without such information implies a need for greater auditing of this industry.