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Joint Tax Committee: Excise tax raises workers' wages by $313 billion

In our chat yesterday, economist Jon Gruber mentioned that the excise tax is projected to raise worker wages by $313 billion between 2010 and 2019. That seemed, well, high. But it checks out.

The numbers come from the Joint Committee on Taxation. Their analysis of the excise tax concluded that the tax would raise a bit over $200 billion by 2019. But most of that money would be raised because employers would purchase cheaper health-care plans in order to avoid the tax, then they would route the difference into wages, and wages, unlike health-care benefits, are taxable. Ta-da!

Gruber simply reversed engineered their estimates to come up with $313 billion. You can check his work here(pdf). Worker wages will increase by the equivalent of a third of what we will spend on health-care reform. That's rather incredible. And the benefits are going to be fairly progressive, too. "The share of wage gains accruing to those with incomes below $100,000 is about two-thirds of the total, and the share of wage gains accruing to those with incomes below $200,000 is over 90% of the total."

That progressiveness comes from two sources. First, the firms that decide to simply pay the tax are, according to the JCT, disproportionately wealthy. Goldman Sachs, for instance, isn't going to try and bring their $40,000+ insurance plans under $21,000. But if the Washington Post is giving 15 percent of its employees really generous insurance, it might change that insurance to avoid the tax.

Second, when the firm cuts back on benefits, the new money tends to be shared more equally across wages. That's not very intuitive, at least from where I sit, but it's what the evidence seems to show, and what the JCT estimates. So though most of the folks with insurance policies bumping up against the tax make more than $100,000, most of the folks who are seeing wage increases make less.

This, again, is why the excise tax is a progressive policy. It's a progressive tax that lower health-care spending (which is regressive) and raises wages. I know that a lot of people don't believe that employers actually will push that money back into wages, but it's happened before, and there's no reason to think it won't happen again.

By Ezra Klein  |  November 13, 2009; 5:35 PM ET
Categories:  Health Economics , Health Reform  
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The caveat is that, at the moment, the available workforce is large, so employers aren't forced to increase wages to attract workers; in fact, a worker who declines employment at any price terminates any unemployment benefit he might be receiving.

While I agree that a reduction in health care costs might eventually increase spendable worker earnings, such a correlation is not immediate. I'm an optimist... but I'm not sure I'd base the federal budget on optimism. The basic question: will such a wage increase manifest itself within a ten-year budget window, given present (and pessimistically predicted) employment conditions?

Posted by: rmgregory | November 13, 2009 5:46 PM | Report abuse

What is the effect on out of pocket costs? Are those being taking into consideration when projecting the net financial impact on different income brackets. The easiest way to lower premiums is to increase cost sharing. This will increase the share of costs paid by people with greater health care usage (obviously) This includes women and people with costly health care conditions.

Posted by: rebeccastob | November 13, 2009 6:08 PM | Report abuse

The thinking is that a compensation dollar is a compensation dollar; that a dollar out the door is a dollar out the door, whether the check sending that dollar out the door is written to the employee or to the Blues or United etc.

For sure, it won't be a dollar-for-dollar exchange if the employers have anything to say about it--and most will.

Ezra, does the FEHBP (as a for instance) constitute a plan meeting the adequacy tests in, say, the bill that passed the House? It really isn't that generous on a coverage ratio basis. Also, there are a LOT of plans provided by employers that are going to need substantial upgrading to pass any sort of adequacy test, because so many plans have, over the last decade, cut the portion that the employer pays so far.

Posted by: wendellbell | November 13, 2009 6:16 PM | Report abuse

Rebecca, the out of pocket costs are capped under the bill. So, there might be some increase in deductible, but the downside is capped.

Posted by: StokeyWan | November 13, 2009 6:17 PM | Report abuse

“It's a progressive tax that lower health-care spending (which is regressive) and raises wages.”

Hey Ezra, aren’t you assuming that this DOES NOT result in higher co-pays and deductibles? If employers purchase less expensive healthcare plans and give workers higher wages but the workers end up spending this money on healthcare services in the form of higher co-pays and deductibles…

How are the workers better off?

How is healthcare spending reduced?

Posted by: kingstu01 | November 13, 2009 6:32 PM | Report abuse

"It's a progressive tax that lower health-care spending (which is regressive) and raises wages."

No it does not lower health care spending; it lowers spending on *insurance*... which lowers coverage and leaves the workers to make up more of the actual costs. It will make little or no change in the total expenditure. Neither proposal has anything to do with actual care or its cost.

That's what Massachusetts researchers who looked into policy options to reduce spending found. They estimated that benefit design (aka lowering coverage) would be as likely to raise total expenditures as it would be lower them -- and in either case the net effect was less than one-half of one percent. It was in fact, the most *un*promising option they considered.

For you to keep extolling the excise tax as a way to control health *care* costs is as misleading as the Republican proposals to remove barriers to selling crummy policies across state lines.

Posted by: Athena_news | November 13, 2009 7:05 PM | Report abuse

But then Ezra you are still okay to roll back part of it as a political compromise. At least that is my impression and I can be wrong.

You were bit elated for the taxes on rich which Reid introduced.

Now that your blog has started to talk about deficit, tell me how in the world you are going to address that without taxing Rich? Orszag is smart and he will come up with VAT. But will VAT be sufficient? We spend some much, I doubt that; meaning taxing Rich will be needed there.

Then why vacate that avenue here when you see this Excise tax raising can be substantial? Just because so many Labor guys are complaining that it will hit Middle Class?

Average plan should be okay for lot of folks despite vehement arguments here and hence excise tax will be okay. That is in addition to your core argument of putting a 'lid' on cost growths.

Majority of folks in this country are not going to accept a plan below Excise tax which does not give basic services. That Market force will be enough to force Insurance to give those right plans.

Posted by: umesh409 | November 13, 2009 7:46 PM | Report abuse

Thanks for posting Dr. Gruber's analysis. As I suspected this is a classic case of garbage-in garbarge-out. JCT and CBO assume "based on economic theory and other evidence" that wages will increase about 1:1 by increasing the excise tax. Once you've made that leap of faith, you can run all the numbers you want--but it's nonsense of course.

Here are links to the three JCT reports mentioned in Dr. Gruber's analysis:

(I couldn't find a copy of the September 17 letter to Hatch but it is discussed in this Bloomberg story. It is key because it apparently shows that the middle class bears 83% of the Cadillac tax. If someone has the actual letter please post.)

Posted by: bmull | November 13, 2009 8:19 PM | Report abuse

what a greatly informative post. bookmarked! :)

Posted by: schaffermommy | November 14, 2009 5:44 AM | Report abuse

Suuuure. Companies are going to give employees raises in an economic environment with 10% unemployment rather than pocketing the difference. I bet you believe banks will actually lend out bailout money instead of paying it to their executives as bonuses too.

Posted by: redwards95 | November 14, 2009 7:07 AM | Report abuse

Rebecca, the out of pocket costs are capped under the bill. So, there might be some increase in deductible, but the downside is capped.

Posted by: StokeyWan | November 13, 2009 6:17 PM | Report abuse

100% WRONG.

There are only IN NETWORK caps on maximum out of pocket costs. When in any plan you go outside of a network there can be no caps. My state of NJ has caps on in network benefits that are usually $5000/$10,000 (single/family) but when you go outside of a network doctors can and do charge whatever they want and absolutely can and DO balance bill you for differences. This will NOT change under the exchange or even under a public plan. Those that think differently are deluding themselves.

Posted by: visionbrkr | November 14, 2009 8:12 AM | Report abuse

"Average plan should be okay for lot of folks ..."

Premiums for the "average" plan vary in cost across the country. The very same _coverage_ that meets the the threshold in a low cost area becomes "gold plated" in Milwaukee, where provider costs are more than 25% higher than the national average. And the cost of coverage for a Fortune 100 company is much, much lower than for a small business.

Beyond that though, your statement illustrates just how far off track the faux reform effort has moved. The objective of reform should be that everyone gets the treatment he needs, when he needs it without financially destabilizing himself, his company, or his country. We do not need more of the kind of coverage that 75% of bankrupts had last year. We should be aiming for a model that is comparable to the care, coverage, and cost available to citizens of every other industrialized country, not some watered down insurance policy that is "good enough".

"That Market force will be enough to force Insurance to give those right plans."

Premium prices are not pulled out of the air, they reflect the cost of care. The only way to get equivalent coverage at less cost is to reduce provider costs -- and the insurance companies don't control that.

Taxing policies based on the price of premiums is not progressive, it is regressive because it discriminates among patients based on local provider costs as well as age and gender rating. People who live in low cost areas are deemed deserving of comprehensive care while those who live in high cost areas must settle for "good enough" coverage.

And of course seniors, who consume 1/3 of care, are exempt from the whole scheme.

Posted by: Athena_news | November 14, 2009 12:28 PM | Report abuse

Bmull makes the key point. Gruber was very misleading when he said in your interview that JCT "shows" that compensation will increase under the excise tax. The JCT analysis doesn't "show" anything, it just uses the same assumption that reduced benefits will be translated 1:1 to increased wages. This is a dubious assumption to begin with, and, as others have pointed out, especially dubious in an employment market so favorable to employers.

Posted by: apr2517 | November 14, 2009 1:07 PM | Report abuse

"Ta-Da" characterizes this "analysis" nicely. When employers face higher costs on health care, they cut costs. They don't give out bonus wages.

In the real world, does anyone know somebody who got a wage increase as compensation when their employer cut their health, dental or vision coverage? That doesn't happen - taxing benefits won't raise wages, it'll just cut the care that people get.

And they won't forget it at the polls. Let's get health care reform done, but not on the backs of the middle class through a benefits tax. Instead, let's tax the rich and make employers provide a minimum level of health care coverage. Support the House bill, not the garbage coming out of Senate finance!

Posted by: PeteSikora | November 14, 2009 1:11 PM | Report abuse

Agree with all the comments that employers will not raise wages -- they will squeeze the benefit plans to keep the costs under the maximum. they will spend a fortune on HR costs to measure the value of the beenfits. there will be no more retiree health contributions because retiree medical costs also come under the cap, as do flexible spending accounts, med, dental, etc. FEHBP is medical only, and that is the measure, but the cap will include EVERYTHING. But you have smart readers who have already said all this.

Posted by: kaylamom1 | November 14, 2009 10:44 PM | Report abuse

Anybody who thinks that employers are going to raise wages when unemployment stands at at least 10% and might be as high as 17% is just plain dumb. If anything, more expensive workers are going to get dumped in favor of cheaper workers. Why? Because employers CAN.

Posted by: WashingtonDame | November 15, 2009 10:25 AM | Report abuse

Different employers would react differently. In highly competitive areas such as software engineering, employers will try to maintain the current benefit/salary balance.

Who though, thinks that public sector employers (which account for a significant proportion of the more comprehensive plans) will be able to raise salaries at all? If they aren't stuck in labor contracts for the higher-cost plans, states and municipalities will use this as an opportunity to reduce their own deficits.

Again though, none of this has anything at all to do with actually reducing the cost of *care*.

Posted by: Athena_news | November 15, 2009 12:40 PM | Report abuse


I hate to tell you i have a client that's a very large software company and they're currently cutting salaries 10% across the board from the CEO on down. They are keeping their benefits the same though for 2010. While your post is true it is (imo) only true in a good economic climate and the current one is not good for employment. Currently employers realize they have the upper hand and are not giving raises. They're telling employees (in not so many words) that they're lucky to still have a job nowadays.

Posted by: visionbrkr | November 15, 2009 8:53 PM | Report abuse

Cost increases for employers don't translate into wage increases. They translate into wage reductions. Taxing benefits is a cost increase. It will not lead to wage gains.

Cost reductions (not cost increases) for employers can lead to wage gains *if* workers have leverage. With only 7% private sector union and a terrible job market, if they don't have a union, they have virtually no leverage.

Taxing benefits would lead to cost reductions accomplished by cutting health care benefits. Democrats would be crazy to embrace taxation of benefits.

Posted by: PeteSikora | November 16, 2009 8:52 AM | Report abuse

I don't see how PeteSikora is wrong. He's got the psychology of the whole thing exactly right and I think that's what matters most. Plus, I still don't understand how this excise tax won't lead to people being put on unsatisfactory plans with high cost sharing and limited benefits. That's not the point of reform.

Posted by: eRobin1 | November 16, 2009 12:06 PM | Report abuse

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