2003 LEGISLATIVE COMPENDIUM Tax Reform

[ Franchise Taxes | Sales Taxes | Property Taxes ]

In spite of widespread pledges of "no new taxes," the comptroller's announcement in early January of a $10 billion budget deficit caused the legislators to look hard for ways to increase state revenues. Legislation was proposed to expand the sales tax base, increase licensing fees, increase tobacco taxes, increase or expand the state franchise taxes, and remove all types of tax exclusion or exemption. TMA argued that it would be bad public policy to tax physician practices when most are struggling under the burdens of inadequate reimbursement and increased liability costs and that physicians pay a hidden tax in the form of charity care caseloads. Although no significant tax expansion ultimately was passed, the issue was fought down to the closing days of the session. Furthermore, an upcoming special session on public school financing will put all the tax issues back on the table. TMA will be aggressively monitoring that special session to keep physicians out of a tax bill. Already, staff is meeting with legislators to inform them of the challenges a franchise or health services tax bill will pose for patients and physicians.

FRANCHISE TAXES

The franchise tax quickly became the focus of most of the tax-expansion effort because many large companies in Texas have been able to avoid all or most of their franchise tax liability by restructuring themselves as limited liability partnerships with out-of-state corporate partners. The general idea behind the franchise tax expansion proposals was to "close tax loopholes," and the efforts were widely justified by the rationale that it's not a new tax if you should have been paying it anyway. The legislative effort failed only because of the complexity of tax law. Every effort to specifically target an expansion to the known tax-avoiders was too inclusive and also levied new taxes on other entities including many physician practices. Under current law, physician professional associations, partnerships and limited liability partnerships are not subject to the franchise tax. Some of the drafted legislation would have extended franchise taxes to some or all of those entities. Some would have levied a 4.5-percent tax on some physicians' net income. Most legislators had no interest in expanding taxes on physician practices, and TMA's objections to the proposals were often important factors in preventing the bills' progress.

The franchise tax issue is very likely to be reconsidered in a special session on public school funding because there is a widespread perception that some of the tax-avoidance strategies are unfair and should be halted. Physicians who are most likely to be affected are those whose practices have complex legal structures in which one corporation or partnership has an ownership interest in another, including limited liability partnerships that are owned by smaller professional associations. Also at risk are arrangements in which management fees are paid to a related entity, especially if the fees could be above the fair market value for the services purchased. These types of arrangements are very similar to those that are likely to be specifically targeted by legislative reforms and may inadvertently be affected by future loophole-closing efforts.

SALES TAXES

Several bills proposed to expand the sales taxes or to remove some tax exemptions. None of these efforts would have imposed sales taxes on health care services, but some would have increased the sales taxes that physicians pay on business services such as data processing, accounting, or attorney fees. Any of these proposals could be revisited in a special session.

PROPERTY TAXES

Physicians should be aware that Senate Bill 340 by Sen. Todd Staples (R-Palestine) could subject them to some new penalties. All businesses currently are required to report the value of the property and equipment used in their business, but effective on Jan. 1, 2004, there are penalties for noncompliance. Late filers are subject to a 10-percent penalty and a fraudulent statement is subject to a 50-percent penalty. An amnesty provision provides incentives to file corrected reports by Dec. 1, 2003.

Tax reform TMA staff contacts:

-Donna Kinney, manager, Regulatory Analysis and Advocacy, (512) 370-1422
-Rich Johnson, director, Division of Medical Economics, (512) 370-1315
-Lee Spangler, JD, assistant general counsel, Office of the General Counsel, (512) 370-1337
-Jenny Fowler, associate director, Legislative Affairs Department, (512) 370-1368

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