Why I support the excise tax
R.J. Eskow wants me to write a lot more about the excise tax, and in particular about the claims of its opponents, and wonders why I haven't been. It's probably useful to answer the meta-question as well as the policy question, if only in terms of setting out the premises of this blog: I am not comprehensive. I can't pick every fight, and don't want to try. The idea behind this blog is that I do the best I can to understand these debates, and then I try to guide readers through my thinking. And in the case of the excise tax, the best evidence and theory I've seen is that the tax is a good idea.
The excise tax on high-value health insurance will disproportionately affect union workers, and so there's been a large, union-funded campaign to get rid of it. The fact that unions have a dog in this fight doesn't mean their argument is flawed. But it is a reason to be skeptical. And the evidence they've been using hasn't impressed me. The Communication Workers of America have been particularly aggressive on this, and they have consistently referenced a study in which they "estimated the effect of the excise tax on the plans with the greatest numbers of participants offered by CWA employers in 43 states for which we have data." The analysis found that "in 2013, the first year of the excise tax, 26 of 43 plans covering families would be affected by the tax." But is that a bad thing?
Over the course of this debate, I've repeatedly talked with union leaders and analysts who wanted to convince me of their side. One of the arguments they frequently used was that they had negotiated their contracts knowing that a dollar in health benefits was worth more than a dollar in wages, because it's exempt from taxation. That, of course, is exactly the problem. The current system sets up an incentive for workers to prefer that relatively more of their total compensation comes in the form of health benefits than wages. At a time when we need pressures to control costs, that's an incentive to increase them. As the CWA example shows, a lot of people have benefited from this system up until now, but at some point, we need to call a stop to it.
More interesting is a recent paper from Jon Gabel, Jeremy Pickreign, Roland McDevitt and Thomas Briggs arguing that relatively little of a plan's price tag can be explained solely in terms of the generosity of its benefits. "Most variation in premiums," they conclude, "remains largely unexplained."
Opponents of the excise tax have argued that this is evidence for their side. After all, if the tax isn't simply catching generous plans, then surely it's a bad idea, right? I don't see it that way. For one thing, if the insurance market is really so mysterious and inefficient that we can't confidently say why one plan is pricier than the next, that's good evidence that there's a place for strong cost controls penalizing fast growth in premiums. It is, at least, worth a try.
For another, the most worrying part of the paper is largely obviated by the bill. It notes that "for small and midsize firms, one to five sick people may account for 50 percent of spending, and thus greatly affect the cost of coverage." That's why we have exchanges that prohibit risk discrimination and that adjust payments based on the risk burden carried by insurers. If the excise tax convinces small employers to enter into the exchange so they're no longer vulnerable to a single employee falling ill, I count that as a good thing. It's another way in which the excise tax encourages the system away from an existing inefficiency.
Then there are all the analysts who do support the excise tax. Most all of the leading health economists. The Congressional Budget Office, which considers it one of the most effective cost control mechanisms on the table. There's the analysis from the Joint Committee on Taxation that says relatively few will pay the excise tax, but that wages will rise substantially as employers downshift to less expensive insurance. There's the simple theory of the thing, which is, in its most basic form, a way of amplifying the market advantage of insurers who do manage to hold down costs.
Moreover, most of the opposition to the excise tax that I've seen has centered on the fact that some of the plans its taxes might not be that generous. That's because the excise tax has been sold as a tax on generous plans, which, in aggregate, it is. But my support for the tax is not based on some moral objection to generous insurance policies. All employer-provided health-care benefits should be taxed. That goes for generous plans and stingy plans alike. People lucky enough to have a job that provides benefits, or a union contract that made their job into a good job that provides benefits, are doing relatively well for themselves, and should have to pay taxes on all of their compensation, just as a worker at a job with no benefits and no union contract has to pay taxes on all of her compensation. The employer tax exclusion is essentially massive redistribution from people the unemployed and people without good benefits to the employed who have good benefits.
The first-best way to accomplish that goal would be to end the employer tax exclusion. That was my initial preference, and it still is. But unions and corporations got together to kill that. The excise tax is is a second-best alternative. The politics are better because you're "taxing insurers," even though workers are ultimately paying, and because you're focusing on generous plans. But it's actually less populist than capping or ending the exclusion, as that would subject health-care benefits to the progressive marginal tax rates workers pay now, while the excise tax is one flat rate. It won't be the first time in health-care reform I've had to settle for a policy I don't think optimal, and I imagine it won't be the last.
All that said, my argument is not that the excise tax is without problems, or sure to work. I quite like Henry Aaron's idea to "base the tax on high-cost plans not on each company’s actual cost, but on the cost of each company’s plan as applied to a population of standardized age distribution." And I don't deny that the excise tax might fall flat. But right now, we need to err on the side of trying cost controls, not ruling them out. I have no doubt that if the excise tax proves overly aggressive, it will quickly be declawed.
More broadly, what we're seeing in the excise tax debate is that cost control will have losers, and for any specific policy, those losers will not want to move forward. Nor, as some hope, will those losers be exclusively rich people. That's why cost control is going to be so hard. But failing to begin this difficult and unpleasant work will, eventually, make losers of us all.
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