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HCAN Vs. the Excise Tax

Health Care for America Now is running the above ad to pressure the Senate to ditch the excise tax. The back story here, at least according to some observers, is that unions don't like the excise tax but were convinced to hold their fire and let health-care reform clear the Finance Committee. Now they want the provision out of the final legislation, and they're willing to go to war to eliminate it.

I have great respect for HCAN, but in this instance, they're stretching the truth. The ad says the excise tax is "a 40% tax on health-care benefits of middle-class workers." It isn't. It's not even a little like that. It's a 40 percent tax on employer-provided health-care benefits above $21,000 for a family, and $8,000 for an individual. If your family's health-care premiums cost $23,000, then there's a 40 percent tax on $2,000 of your premiums. It's inconceivable that anyone's full health-care policy would be taxed at 40 percent.

Moreover, your family's health-care premiums probably don't cost $23,000. The average employer-provided health-care plan cost $13,375 in 2009. There are some middle-class workers with uncommonly generous health-care plans, but they're not the norm. This isn't as progressive as a tax on millionaires, but it is, in general, progressive. Goldman Sachs traders, for instance, have health-care plans valued around $40,000 a year. Wal-Mart employees don't.

Over on the HCAN site, they're arguing that "The House bill covers more people, is more affordable, and is just as deficit neutral as the Finance bill." The first two clauses are true. The third simply isn't. The House bill is funded through income taxes, which don't grow as quickly as health-care costs. In the second decade, the costs of the plan rapidly outpace the revenues, and the deficit explodes. Conversely, the excise tax is inside the health-care sector, and is designed to grow more quickly than health-care costs. It cuts the deficit in the second 10 years, which makes it quite a bit friendlier to the budget.

The argument against the excise tax is that it cuts the deficit by encouraging employers to shop for cheaper plans. The Joint Committee on Taxes suggests that the tax won't raise money because people will pay it. It will raise money because it will encourage employers to purchase cheaper plans for their employees and divert money they've saved into wages, which are taxable income. That means that a number of very generous plans will become more like middle-range plans. They'll have deductibles if they don't already, tighter networks, tiered drug formularies and so forth. Any plan that's lavish enough to even near the tax is going to remain a very generous plan, but it will become less so on the margin.

Some people, myself included, think that's a good thing. These plans are already hugely subsidized by the employer tax exclusion. If your employer gives you $15,000 in wages, you pay taxes on it. If you get $15,000 in health-care benefits, you don't pay taxes on it. Conversely, if an unemployed worker purchases $15,000 in health-care benefits, that's money he pays taxes on. It's wildly regressive. The excise tax doesn't cancel that out so much as ever so slightly chip away at the edges of it (the first $21,000 of a family's plan would still be untaxed).

If you believe, as I do, that too much money is being moved from wages to the automatic growth in health-care costs, then the excise tax is a useful policy. But folks can disagree on that point. It is not, however, fair to sell it as a straight 40 percent tax on benefits, nor to suggest it isn't in fact superior to income taxes as a deficit-reduction measure. It's both things, but it achieves them by encouraging employers to tighten health-care benefits.

By Ezra Klein  |  October 16, 2009; 3:32 PM ET
Categories:  Health Reform , Taxes  
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Comments

Ezra, you keep missing the elephant in the room here.
"It will raise money because it will encourage employers to purchase cheaper plans for their employees and divert money they've saved into wages, which are taxable income."

You're assuming that compensation savings will be diverted into wages. That's a bad assumption. As I've pointed out here (http://realignmentproject.wordpress.com/2009/09/07/the-problem-with-ending-employer-based-health-care/), the reason that unions are opposed to the tax is that they know that the compensation that their health care plans represent were won when labor had much more clout than it has today, and that the likliest outcome is that employers simply pocket the savings, genuflect in the direction of maintaining profitability and preserving jobs, and walk away with the sweat equity of generations of workers.

Posted by: StevenAttewell | October 16, 2009 3:44 PM | Report abuse

In an earlier post today you wrote:

"Trade groups, for one thing, are biased toward their present membership, not their future membership."

I think it's worth repeating my comment to that here:

I would add that they are also biased towards their present memberships' present membership.

The unions' efforts to stop the tax on high end health insurance is the perfect example. It helps present members as long as they stay present members. But it doesn't help present members overall as they don't need a tax break much when they have their high paying union job. But in today's world there's a very high risk that they will lose that high paying union job and not be able to get another high paying union job. Then they will really need a generous universal health insurance bill.

People are much better off having a little less in good times to insure that they have much more, including healthcare, in a lot less good times. This current stance by the unions is bad for its members, and it's certainly bad for its member's sons and daughters, who very likely won't have union jobs for much, most, or all of their lives.

Posted by: RichardHSerlin | October 16, 2009 4:04 PM | Report abuse

Ok, it looks like a union is not defined as a trade group, sorry. Please substitute unions for "they" (trade groups) in my above comment and earlier one.

Posted by: RichardHSerlin | October 16, 2009 4:19 PM | Report abuse

I'm worried about unintended consequences of the excise tax. Case in point: What constitutes "employer provided"? A friend has three young children and a terminal illness. She and her husband are both consultants for nonprofit organizations and make well below $100K each--comfortable, but not obscenely wealthy, especially where they live (major city on the West coast). They had to create a partnership in order to buy a health care plan. Because of her illness they pay far, far more than $21K/yr. for their insurance. Would they, and people in similar circumstances, be subject to the excise tax? If so, this seems grossly unfair.

Posted by: tediouspedant | October 16, 2009 4:26 PM | Report abuse

The only way workers won't receive the savings is if workers are currently being overpaid. Compensation levels aren't currently being set due to generosity on the part of firms - they are set to attract and retain talent. Slicing health benefits without raising wages is a good way to have your best employees to spend more time on resumes than actually working. To modify Smith: it's not the generosity of our employer from which we expect our paychecks, but from his regard to his own self interest.

Union members might well lose out, but that's only because union members are overpaid relative to their productivity.

The excise tax is good policy. It links future expenditures to a funding source which grows at or faster than expenditures. I would prefer simply taxing benefits and lowering marginal rates/increasing the standard deduction, but whatever works.

Posted by: justin84 | October 16, 2009 4:33 PM | Report abuse

tediouspedant - that family is expected to find other good plans under the new proposal because insurances will not be able to deny coverage based on pre-condition. Meaning the cost will be below $21K as well. In general the point is larger availability of plans with new proposals so folks do not have to pay higher for coverage.

About the past negotiations of Labor - it can be argued other way too; employers would not have paid that increase in health care cost nor wages if insurances were available at cheaper prices then.

Talking about past negotiations - that is non-sense. It is a form of demanding redress for slavery and compensation for that. Where does it end?

Labor unions are basically throwing a bomb in the room to destroy this agreed framework.

People need to wake up - Obama and Congress have to tax rich folks, Bankers and financial transactions possibly. But that is to address One Trillion Dollar Deficit every year for the next decade. You cannot use that tax collection here for Health Coverage.

Already Obama and Dems have zero credibility when it comes to controlling costs (and sticking to cuts agreed). We cannot add more to it.

We cannot have welfare of larger population destroyed by few workers. I am not a union worker and majority in America are not too. It is high time we get off this 'mentality' of favoring Labor at the cost of everyone else.

Neither Obama was elected alone by Labor nor his he elected only for Labor.

Posted by: umesh409 | October 16, 2009 4:43 PM | Report abuse

If this was about recouping lost fed income they would tax it at the income tax rate that would be applicable. So, if I made $30k, my effective tax rate might be 10-20% (depending on deductions).

It is not about lost income taxes, it is about cutting benefits for those who choose health benefits over pay.

Now, Ezra you are free to say "If you believe, as I do, that too much money is being moved from wages to the automatic growth in health-care costs, then the excise tax is a useful policy", but who are you to decide what other people negotiate in terms of employment. Any other benefits you think people shouldn't want. This is engineering other people's lives via policy, and its one of the things that get us liberals in trouble. It isn't limiting tax deductibility, it's a punitive, don't go there tax! What other taxes are as high as this? Very few, maybe for lottery winners.

You also say:
"Moreover, your family's health-care premiums probably don't cost $23,000. The average employer-provided health-care plan cost $13,375 in 2009."

Okay, I know you know better. Add trend to this figure -- like you would if you didn't like the policy. 4 years at 8% = 36%. Then the average = 18,200. And, that includes a lot of garbage health plans. Now, take into account the age/health disparities of workforce populations, and you really are limiting benefits.

It's easy for you and I to knock this, being young and healthy. But, to folks making $40,000 with a good policy, a 40% tax could be a heavy burden -- but will more likely be met with cuts in health care.

Protecting miners and firemen is not = to protecting high cost workforces. That's just a few political winners, and there will be plenty of losers. Manufacturing is all old people now-a-days, for one. Just what we need, pile on US manufacturing some more...

this sucks, and is a result of the fact that wealthy people own our political system. When it's something they want, we all pay (when they don't set up tax havens). When it's something we want, we pay exclusively.

Posted by: rat-raceparent | October 16, 2009 5:00 PM | Report abuse

When you're equalizing a disparity that exists because of an explicit government subsidy, you're not engineering people's choices. You're undoing efforts to engineer people's choices.

As for the question of whether wages will rise, it's pretty non-controversial among economists, even among skeptics of this policy. For one thing, there' empirical evidence for it. In the late-90s, managed care held how the growth of health-care spending, and wage rose right on schedule. Smaller studies demonstrate much the same thing, and so does theory: when you're dealing with skilled labor forces, if you start pocketing wages and your competitor is pumping that money into higher wages, you lose in hiring, and that costs you more.


Posted by: Ezra Klein | October 16, 2009 5:06 PM | Report abuse

Let's not suggest that the Senate Finance bill accomplishes deficit neutrality through perfectly honest means either. They only take the doctor fix for one year, leaving the Senate in a separate bill to blow a $235 billion dollar hole in the budget.

I agree with you on the excise tax, but there's some spin in the SFC numbers as well.

Posted by: dday212 | October 16, 2009 5:13 PM | Report abuse

Ezra,

If you're really looking for an "accurate" discussion of this issue, then its also time to stop talking about "average" premiums.

These taxes will disproportionately impact middle-class families that happen to live in states with high-cost health care. You can argue that its a good thing that they are paying higher taxes, as policy/economists do, but it is very clear that middle class families in those states will be seeing a significant tax increase. Period.

Posted by: wisewon | October 16, 2009 5:20 PM | Report abuse

Also, the thought that there will be a 1:1 exchange between benefits and wages with lower cost health care is far from clear-- regardless of the "consensus" you've seen. I'd love to see you post the best data on the topic, I've never read anything that was convincing enough that I'd be willing to bet MY paycheck on.

On the same note-- remember those "US businesses are not as competitive because they pay for health care?" If the 1:1 theory is true, then the competitiveness argument doesn't hold. Companies are either paying market-rate compensation, or they weren't (I think the rates answer is in between. Employees will see SOME improvement in wages, but not a 1:1 rate.) You have made both arguments, of course, so choose which one was wrong.

Posted by: wisewon | October 16, 2009 5:25 PM | Report abuse

First of all, Ezra, not all workers are highly skilled. There are plenty of semiskilled and unskilled workers who don't have the same bargaining power as skilled workers - and bargaining power is the key issue here.

Secondly, higher wages is not the only response to high skill - deskilling, automation, etc. are also responses.

Thirdly, am I correct in saying that your position is that wages are set entirely by supply and demand? That the relative bargaining power of labor vs. management has no bearing on this situation? If so, I'm quite surprised.

Posted by: StevenAttewell | October 16, 2009 5:31 PM | Report abuse

its funny but when AHIP said this they were demonized for a week (and counting). Now that its the unions and HCAN they get a slap on the wrist at best from Ezra. Nice double standard. If AHIP cured cancer I'd bet liberals would rather die than be cured.

Posted by: visionbrkr | October 16, 2009 8:54 PM | Report abuse

If you really thought Obamacare would control premiums you wouldn't be counting on the excise tax to raise mondo billions. But if premiums stay uncontrolled there will be a lot of pressure to raise the amount of the exemption. Either way, this tax is not going to be popular with blue-state voters and it's not going to generate the kind of revenue supporters hope.

There's no perfect solution but I think workers would be okay with ending the exemption entirely if there were some fair way to cash out.

Posted by: bmull | October 17, 2009 3:47 AM | Report abuse

amazing that folks focus on the supply side (subsidies and taxes) but not on the demand side (costs). You can only keep throwing so much money at it until you need to focus on the real issue (utilization). Kind of like the same problem states are going through now with no revenues and endless entitlement programs and no way to pay for it.

Should we furlough healthcare in the future like we're doing with state employees? Don't get sick on an odd number day because there'll be no coverage for that. The short-sightedness of our Democratic politicians is scary.

Posted by: visionbrkr | October 17, 2009 8:29 AM | Report abuse

Apparently another way of raising revenue will be the massive surcharges on people who do not meet fitness standards. I hope there will not be exemptions for celebrities in the democratic party. Because some top ranking people are morbidly obese. Stabenow, Barney Frank and David Axelrod come to mind. Some have had spouses or partners whose behavior could bring AIDS into play. Stabenow, again, whose husband frequented prostitutes, and Barney Frank, whose partner of many years, Steven Gobie, had set up a prostitute ring operating out of a teachers' lounge in an otherwise reputable suburban Maryland elementary school. The latter happened thirteen or fourteen years ago, but the episode was so weird some of us still remember it.

Posted by: truck1 | October 17, 2009 11:24 AM | Report abuse

Talking about 'average' premiums is entirely fair. Why should families with reasonable premiums be forced to pay for the tax subsidy for those with health plans which cost as much as a new mid-size sedan? I don't see how $800 on a $23,000 health insurance plan or $1,200 on a $24,000 health insurance plan is going to put an 'unfair burden on middle class families'. If you want a $24,000 health plan, they pay the tax. Or get a slightly cheaper plan with a higher deductible (or "a" deductible, since I'd be shocked if a $24,000 plan would have a deductible if the insurance co couldn't charge for pre-existing conditions). Or if you are being priced out of an area, then move. If middle class families have $21,000+ health insurance plans, then it seems to me that very strong market signals are being excessively dulled by tax subsidies and employer contributions to premiums.

As for labor markets, if there are many workers willing to work and many employers willing to hire, then wages will reflect the productive value of workers. Employers don't volunarily pay more for labor than they believe that labor to be worth, and if workers are productive then they will ask for raises or leave rather than be underpaid. Now bargaining power ebbs and flows: right now, unemployment is high and so employers have more bargaining power (which is just another way of saying the demand for labor is down and the new equilibrium wage rate and quanity of labor employed both fall).

There are isolated cases in which workers can be taken advantage of: perhaps someone is highly skilled at their job, but there isn't another job like it, or perhaps they are skilled at using internal company software, a skill that won't transfer elsewhere. Perhaps someone lives in an area with only one or two employers for their line of work and something is keeping them locked to that employer (health insurance, family ties, etc) so that they are highly unwilling to leave. In these situations, employers have monopsony power and wages will be less than productivity (although in the first case it is also the employees fault for specializing in a propreitary system and granting his employer monopsony status). In cases where workers are just being taken advantage of (those with very low skills and education), then we can and should put into place basic labor market protections to level the playing field, but that situation is not what most workers face. If you really think about it, if you believe that competitive markets don't (in general) set wage rates in the U.S., then why are U.S. employers so generous to their workers? Why do workers receive 2/3s of national income? Why aren't American workers paid like Chinese workers?

Posted by: justin84 | October 17, 2009 11:55 AM | Report abuse

As for U.S. businesses not being competitive because of healthcare, that isn't an issue in many industries. However, in industries such as automaking, unions had negotiated total compensation above what their membership's revenue product of labor and so domestic automakers were indeed uncompetitive because of healthcare. Ezra is right - in general, healthcare is part of compensation paid to attract and retain talent, and employers risk cutting benefits without raising wages at their own peril.

Posted by: justin84 | October 17, 2009 11:55 AM | Report abuse

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