2005 Legislative Compendium: Tax Reform

Two issues dominated the 2005 legislative agenda - fixing the school finance system deemed unconstitutional by a state court and delivering billions of dollars in property tax relief. The biggest obstacle was how to offset $3.7 billion in property tax reductions. The magnitude of the dollars needed, and the challenge of finding them, meant the issue commanded center stage, influencing the progress - or lack thereof - on many seemingly unrelated bills.

Despite the court's ruling, and hundreds of hours devoted to crafting a workable tax plan, legislators were unable to pass a tax bill during the regular legislative session, or during the first special session that ended July 20. The governor called a second special session the very next day to address the taxing dilemma. To date, an agreement between the House and the Senate seems elusive.

On its own or via court order, the legislature will ultimately adopt a tax reform plan. Regardless of when the issue is resolved, medicine's position will remain the same: Taxing patient care is neither good public policy, nor in the best interest of Texas. Unlike other businesses, physician practices cannot pass on a tax increase due to fixed payments from government payers and non-negotiable commercial plan payments. Moreover, physicians already provide $1 billion in charity care and significant subsidies to Medicare, Medicaid, the Children's Health Insurance Program (CHIP), and other public programs that pay substantially below-market rates.

TMA will be actively engaged in the tax debate as long as the legislature continues discussion on school finance reform. Outlined below are several scenarios that would rope in medicine.

  • To replace school property taxes with state revenue, legislators must replace or modify the existing franchise tax to capture more businesses. Currently, capital-intensive industries are the hardest hit by the existing tax structure. Legislators would like to expand the tax base to service industries, which would include health care. Another possible mechanism to broaden the tax base would be to replace the existing franchise tax with a payroll tax at a low rate. An expanded business tax could affect most physician practices.
  • Additionally, the governor and several legislators have proposed taxing elective cosmetic surgical procedures. In both the regular and special legislative sessions, amendments were offered. Medicine vehemently opposed the tax because it sets up a dangerous precedent for directly taxing other medical services. Plus, who determines who pays the new tax? The line between "cosmetic" and "reconstructive" surgery is not always clear, and that would leave it up to state tax auditors to determine medical necessity.

Physician Tax Credits 

If physicians are not excluded from a tax bill, the legislature is receptive to tax credits to at least ameliorate the impact. During the regular legislative session, both the House and Senate versions of the tax bill included tax credits for physicians participating in public programs. The House version offset the tax impact on physician practices by allowing tax credits based on the practice's Medicare, Medicaid, and CHIP revenues, but only if those programs composed 15 percent of the physician's practice. In the Senate, the 15-percent threshold was eliminated, but the bill would have allowed a tax credit equal to 20 percent of any physician's total revenues from Medicaid and CHIP only. Medicare was excluded.

Tax Reform TMA Staff Contacts:  

  • Greg Herzog, Legislative Affairs, (512) 370-1360
  • Rich Johnson, Medical Economics, (512) 370-1315
  • Donna Kinney, Regulatory Analysis and Advocacy, (512) 370-1422
  • Lee Spangler, JD, Office of the General Counsel, (512) 370-1337 

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