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Bad framing on the excise tax

A lot of the arguments over the excise tax are getting caught in a bad, and even slightly misleading, sales job from its supporters. Sen. John Kerry's blog post defending the policy, for instance, isn't playing it straight. Saying it won't tax employees is a distinction without a difference: It will tax insurers, which will add the tax into the cost of their plans, and employers will either choose different plans or pass the cost on to employees. Similarly, saying it will affect only "3% of premiums in 2013" is designed to obscure the fact that it will hit a lot more policies in 2020. But this is one of those cases when bad arguments mask a good policy, rather than the other way around.

No one defends the tax exemption for employer-sponsored health insurance in principle. They only defend it in practice. The excise tax has its opponents, but none of them say we should make food, or broadband Internet, tax free as long as it is provided by employers. You don't even hear them demanding that the bill make non-employer-provided health care tax free. No one, in other words, is interested in expanding this arrangement to other sectors, or even to the rest of the health-care sector. But given that the tax exclusion for employer-provided health care amounts to a subsidy worth about $250 billion a year, it's got a lot of defenders.

As a final note, the excise tax is a substitute for simply capping the employer tax exclusion. The swap came about because the politics of the excise tax are superficially better: Rather than taxing "workers" or "businesses," you're taxing "insurers." But insurers pass the cost along, of course. And the excise tax is more regressive than capping the exclusion. If you cap the exclusion, people get taxed at their normal marginal tax rate, which is virtually nothing for low-income workers. The excise tax, by contrast, is a flat surtax of 40 percent, no matter what your income. In this case, making the tax sound more populist also made it substantially more regressive. One way to "fix" the excise tax would be to convert it back into a cap on the exclusion, but there's not been much interest in that.

By Ezra Klein  |  January 11, 2010; 9:03 AM ET
Categories:  Health Reform  
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I've often disagreed with much you say but agree with the fact that wages are absolutely affected by healthcare costs but in that same vein won't just shifting the cost to the government (ie subsidies) do the exact same thing? In 10-15 years we'll become immune to costs because "we're not paying it, the governemnt is" although just like now it'll be hidden and we'll all be paying much more in taxes for it.

Posted by: visionbrkr | January 11, 2010 9:34 AM | Report abuse

I like the post. The title is a little generous. "Bad framing" is not really accurate. The framing is excellent politically. But its simply not an honest accounting of the excise tax. "Dishonest framing" is what this post should say.

On a similar note, Kerry is trumpeting the party line from the administration. Obama et al deserve the same criticism.

Posted by: wisewon | January 11, 2010 9:52 AM | Report abuse


I have to disagree with you that the marginal tax rate for low-income workers is "virtually nothing." For each extra dollar they earn, they have to pay the 10 or 15% individual income tax rate, plus the employer and employee payroll tax (15.3 percent), plus the state individual income tax. Now that's under 40 percent, but it's not "virtually nothing," as you explain. Well, it's certainly "virtually nothing" compared to other countries. ...

Anyhow, the main case for the excise tax or any tax on employer-provided health benefits is the revenue over the very long run. Because millionaire income doesn't rise as fast as health care costs, raising the funds through the millionaire tax amounts to installing a ticking time bomb of when you have to raise taxes on the middle class.

Posted by: BradGabel2002 | January 11, 2010 10:01 AM | Report abuse

BradGabel2002, my understanding is that while revenue raising is a nice feature of the excise tax, the hope is that it will lead to changes in both the industry and consumer behavior. As more and more plans are affected by the excise tax, more consumers (or their employers on their behalf) will seek out cheaper, more cost efficient plans and the industry will be forced into providing such plans.

Posted by: MosBen | January 11, 2010 10:54 AM | Report abuse

"If you like your current insurance plan, you can keep it."

Thus campaigned Obama.

Except the excise tax is designed so that those with generous tax-exempt insurance can be assured that they do not get to keep their plans.

In fact, it is the express purpose of the excise tax to get employers and unions to renegotiate those plans to ones of lesser benefits.

Another nail in the coffin of broken campaign promises, and reduced credibility of our current admin.

"Let no campaign promise go unbroken" seems to be the mantra for dems these days.

Posted by: jc263field | January 11, 2010 1:43 PM | Report abuse

How about the problem with a policy claiming to raise revenue on a "double bank shot" of pushing employers to scale back the share of health expenses covered by the coverage they provide, which then leads to a one-off reduction in premium costs, which leads to a dollar-per-dollar increase in wages, which leads to an increase in payroll tax receipts and personal income tax receipts?

The idea that in any economy which is not close to full employment - as we have not been for decades now - there will be a dollar-per-dollar increase in wages in response to a one-off reduction in quality of health care insurance purchased is silly. Yet if its a quarter per dollar, which is more plausible, the revenue falls over 60% short of the CBO modeling.

This so-called revenue measure relies on gaming the weaknesses of the assumptions made in the CBO model in order to be able to use that mathematical toolkit, rather than offering a realistic prospect of actually raising the revenue promised.

And this is setting aside the argument that doing more of the same will this time have a different result: that further reducing the average share of health care expenses covered by insurance will tend to reduce the growth in total health care costs, rather than decreasing the growth in elective health care costs and accelerating the growth in emergency health care costs, as it has been doing over the past decade.

Posted by: BruceMcF | January 11, 2010 1:53 PM | Report abuse

I like the excise tax because I see it as part of transforming our system into one that treats everyone equally. The tax exemptions on employer provided health insurance lead to the segmented, broken, inefficient, expensive, unequal and unjust system of memoryless-premium, year-to-year health insurance that ignores life-cycle considerations while disproportionately benefiting well-paid workers at large companies and shafting everyone else.

Unions would do everyone a favor by putting away their union-member-representation theater, accepting this necessary change, and replacing their Leiberman-like misrepresentation of the issue with a focus on how to make it more fair for everyone including the reforms proposed by Jon Gruber and perhaps a demand for the share of the premium annuity once projected to be paid by the employers to the insurance companies for their members.

Krugman recently urged Firedoglake to ask themselves if they really want to be like the right-wingers with their endless supply of fake scandals. Similar thinking makes me want to ask SEIU and AFL-CIO representatives to behave in a constructive way.

Posted by: bcbulger | January 11, 2010 2:30 PM | Report abuse

Sociel engineering never works. Take a look at what welfare did to the black family. Ezra is another example of an elitist who thinks that our economy is an essay paper. Ezra you need to get a real job so you have some understanding of how we have achieved greatness. You can't tweek a bad bill that is composed of 2000+pages of babble.

Posted by: kdieck | January 11, 2010 2:53 PM | Report abuse

Call it "bad framing" if you want, but the real problem for the pro-excise tax crowd is that left and right populists are united on this issue.

Excise tax = bad policy and *spectacularly* bad politics. John Kerry and you can massage all you want. Here's hoping dems in the House will hold fast and force the Senate/President to alter their stance.

The Mercer reports, Health Affairs study, and others are devastating policy critiques of the excise tax. Let's see an answer for those, Ezra, not a bad frame dodge.

Posted by: PeteSikora | January 11, 2010 3:11 PM | Report abuse

Not sure if you recognize the familiar position liberals are often in: justifying the means with the end. But here, even the end is bad. Why is it you keep smiling about this atrocious plan?

Posted by: spk2moi | January 11, 2010 3:14 PM | Report abuse

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