New MCFE Issue Brief on Determining the Fate of the Minnesota Provider Tax

Minnesota’s provider tax, scheduled for repeal effective January 1, 2020, is one of the headline issues of the 2019 legislative session.   In our new Issue Brief, "Considerations in Determining the Fate of the Minnesota Provider Tax," we take a closer look at several policy topics, questions, and claims regarding the tax itself and the arguments surrounding whether to reaffirm and extend the tax or allow the scheduled sunset to take place.    We provide background on the tax’s origins and legislative intent, discuss the evolution of its role in public health care finance, and evaluate its merits on several tax policy principles.    We conclude with a brief discussion of a recently proposed alternative to the tax and other general alternative approaches through the lens of tax policy principles.

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Primary Findings

  • The provider tax is unmoored from its original statutory intent and purpose, but still serves as an important revenue source for Minnesota’s public health programs.   The request and subsequent approval to operate MinnesotaCare as a “Basic Health Plan” under the federal Affordable Care Act essentially shifted funding responsibilities for this program to the federal government.  As a result, the primary purpose of provider tax revenues today is to support Medical Assistance, Minnesota’s Medicaid program.   From FY 2018-21, the state’s Health Care Access Fund  -- predominantly supported by provider tax revenues -- is projected to provide roughly 1/3rd more support for Medical Assistance than the collection of surcharges that have been specifically enacted to support that program.
  • “Fairness” issues are more complicated than the standalone incidence analysis of the provider tax suggests.    Provider taxes are one of the most regressive taxes in the state’s revenue portfolio and its elimination would reduce the overall regressivity of the state/local tax system by about 20%.   However, the “benefit incidence” of the tax falls disproportionately on lower income households resulting in net fiscal incidence that is highly progressive.   Moreover, this net incidence offsets the regressive characteristics of health-care related tax expenditures which research has shown to skew disproportionately to higher income households.
  • As a gross receipts tax, the provider tax features inherent transparency problems and tax administration complications.    The provider tax’s legislative history suggests “invisibility” was a policy objective when it was first enacted, and that objective continues to be met today.  The tax is embedded in health care services, and imposing the tax on wholesale drug distributors increases the cost of prescription drugs while most Minnesotans likely believe their prescriptions are exempt from sales taxes.   The provider tax requires a separate auditing, administrative, and compliance infrastructure for both organizations subject to it and the state.   And, as a recent court case has shown, moving a tax upstream from consumers to providers increases the likelihood of administrative and legal disputes inherent to the intersection of business structures/activities with conflicting interpretations of often ambiguous and imprecise statutory language.
  • Although revenue adequacy is driving the debate over the tax, the implications for the stability and responsiveness of the state’s tax system also merits consideration.    Overall, state tax revenues have not grown as fast as the state economy, but the provider tax is an exception.  Real provider tax revenues have grown 3 times faster than real state GDP over the past 20 years reflecting health care’s growing share of the state economy.   The provider tax plays a substantive role in improving the responsiveness of Minnesota’s tax system to changes in the overall economy.   That role is magnified by the fact that the health care sector currently escapes a lot of taxation that other business sectors do not while at the same time a primary driver of public spending is health care delivery.
  • The “claims expenditure assessment” proposed as a provider tax substitute may address some provider tax disadvantages but also may introduce some new issues.   Shifting collection and remittance away from providers and onto insurers would improve the administrative efficiency of the tax and might trigger some ability-to-pay gains through preferential treatment of out-of-pocket health care delivery.   However, such an approach might conflict with federal requirements that state taxes used to support state shares of Medicaid spending must be uniformly imposed.   Perhaps more significantly, another state’s experience suggests these “claims assessments” introduce market distortions with appreciable revenue impacts.    Michigan repealed its claims assessment program in part because the assessment collected only 2/3rds of its anticipated revenues.
  • An interest in provider tax replacement or partial backfill should include a state tax expenditure review.    Such a review is long overdue – a blue ribbon commission blueprint from 2011 for reviewing, evaluating, and incorporating state tax expenditures into the budget process has received no attention or action.  Doing so now would be an effective marriage of political need and good tax policy.   Moreover, the timing for undertaking such a review is especially ripe given the federal conformity decisions that must also be made in 2019.