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The idea that would've been better than the excise tax

I'm more optimistic than Cato's Thomas Firey that the excise tax will bend the cost curve, but we're in full agreement that it would've been better to stick with Max Baucus's original idea and cap the employer tax exclusion, and it would've been far better to embrace Ron Wyden's proposal to convert the employer tax exclusion to a standard deduction.

From a progressive standpoint, the advantage of ending the tax-free treatment of health benefits rather than slapping a new tax atop them would have been that if compensation in the form of health benefits wasn't tax free, it would've been treated like wages.

And wages are taxed progressively. The excise tax, by contrast, does not have progressive rates -- it's just a flat 40 percent. If health benefits were treated as wages, then a middle-class worker with a $27,000 health-care plan would've paid much less in taxes than a Goldman Sachs trader with a $27,000 health-care plan. With the excise tax, the two will pay the same rate.

But unions partnered with House Democrats to fight the cap on the employer tax exclusion, and the Obama administration realized that it couldn't defend a policy that it had attacked John McCain for proposing, and then everyone ended up with a policy that did basically the same thing as capping the exclusion but did it in a less progressive fashion. And that's how a bill becomes a law.

By Ezra Klein  |  January 15, 2010; 11:42 AM ET
Categories:  Health Economics  
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but neither employee is paying the tax. the insurer is. and don't you contend that, given the numerous improvements of health care reform, over the long run the cheaper plans the employer offers those workers will provide comparable, or perhaps even better coverage?

and don't you also contend that those workers will see wage increases over ten years on the order of a few thousand dollars?

so isn't the net effect closer to neutral than regressive?

Posted by: andrewlong | January 15, 2010 12:07 PM | Report abuse

Actually, the idea that would have been better than that would have been the original pay-for from the White House, lowering the rate on itemized deductions to where it was during the Reagan Administration. Then we would have paid for this a long time ago.

Posted by: dday212 | January 15, 2010 12:20 PM | Report abuse

I agree with you on this. It would have made a hell of lot more sense to include the taxation of health insurance policies at the individual level. That way the union schoolteacher would pay lower taxes on her policy than the Goldman analyst with a comparable policy. This tax could have also been buffered by a deduction for health insurance costs linked to income. Such a policy would also benefit the person buying their own insurance on the individual market.

My fear is that by taxing the insurance companies on their high cost policies, we will all pay much more for health insurance, as the insurers will just do the easiest thing (for them) and indiscriminately pass the taxation costs on to all policy holders. Is there anything to prevent this from happening in the current legislation?

Posted by: Beagle1 | January 15, 2010 12:25 PM | Report abuse

I don't understand this false dichotomy -- employer exemption or tax all benefits -- and I think you Ezra, do a great disservice by blithely writing as though there were no other choices. There is for example, a big difference between what John McCain proposed (and Obama opposed) and something like Mike Enzi's approach.

Embracing Mike Enzi's proposal to transfer the exemption to individuals would have preserved the tax-free status of benefits for most individuals. At the same time, it would have cured the inequity that requires individual subscribers to pay for insurance with after-tax dollars while giving a free pass to anyone with employer paid benefits.

Not only would an individual exemption be fairer all around, but it would put us on a path to a more rational approach to controlling "Cadillac" benefits. If you really believe that the level of coverage is a problem, use that to set the exemption. Instead of taxing programs with better coverage out of existence, let individuals supplementing whatever basic coverage is offered with additions paid for with their own money.

Of course that approach differs from what we are getting in that it focuses on putting us on a path to a true universal system where everyone is treated the same and increasing individual coverage options for everyone.

Posted by: Athena_news | January 15, 2010 12:42 PM | Report abuse

What do you mean that "the Obama administration realized that it couldn't defend a policy that it had attacked" during the campaign?

It is defending many policies it attacked during the campaign. Like Clinton's mandate.

And Obama promised no new taxes on those under $250,000. Oops. "Get to keep the insurance you have." Oops, another promise broken with the excise tax.

The admin has already flip-flopped so many times on health care that doing it again on the exclusion would meaningless.

Or, it just gives a blogger an easy way to be an apologist for the admin pulling a bill full of bad policy through Congress at the last minute to put a win in its hat for the upcoming state of the onion speech.

Posted by: jc263field | January 15, 2010 1:28 PM | Report abuse

"The excise tax, by contrast, does not have progressive rates -- it's just a flat 40 percent. "

Your statement is somewhat inaccurate. The income tax is *more* progressive than a flat tax with exemption, but a flat tax with exemption is still a progressive tax. If it were a flat tax levied on all plans regardless of value, then it would not be progressive.

Let's assume the threshold were $20,000. If I have a plan that costs $19,000, I pay nothing. If I have a plan that hosts $21,000, then I pay $400. I have a plan that costs $30,000 then I pay $4000. The amount paid still goes up with the value of benefits. Couple this with the fact that healthcare is a normal or superior good. (Income elasticity of demand greater than 0, and possibly greater than 1), and you have a fairly (but not very) progressive tax.

Posted by: zosima | January 15, 2010 2:37 PM | Report abuse

Would a tax deduction have been adjusted for age, gender, or high-cost state? I think there would have been huge problems codifying that.

The excise tax threshold having those adjustments is much easier. It would not have been better to simply tax health benefits with a capped deduction.

Posted by: jfung79 | January 15, 2010 5:26 PM | Report abuse

"Would a tax deduction have been adjusted for age, gender, or high-cost state? I think there would have been huge problems codifying that." -jfung79

It would be no more difficult to codify an individual exemption than the convoluted excise tax that is about to be adopted. In fact, it would be quite easy (and fairer to everyone) to construct a tax code for an individual *exemption* based on the actuarial value of the coverage.

If for example, Congress defined Cadillac plans as those that exceed an actuarial value of 80 (meaning plans that pay more than 80% of expected costs), the exemption for plans that exceed that could be reduced by a set percentage.

The W2 form for employees would include the amount paid in premiums and an indication of the actuarial value of coverage. If the value is 80, the entire amount paid by his employer would be exempt for the individual. If the actuarial value were 85, the individual exemption would be only 90% of the premium. The percentage would decrease the higher the actuarial value.

Using that kind of scheme would avoid all the special deals for unions, public safety workers, older women, etc. and everyone would be treated exactly the same.

It would also be more responsive to changing costs levels. There would be no bracket creep because as premiums increase, the exemption would still cover anything up to the set actuarial value. There would be no reason for successive special interest groups to seek exceptions either.

Another advantage is that it would could also apply to those in the individual market. Individuals would get some new insurance form to attach to their taxes that would show the amount of premium they paid and the actuarial value of their plan. An individual purchsing a plan with an actuarial value of less than 80 would get the same exemption as those with employer paid benefits. If he buys a Cadillac plan, he pays for the excess with after-tax dollars.

That would be a much more rational approach to discouraging excessive benefits. Anyone who wants extra coverage would pay for it themselves in after-tax dollars. At the same time, individuals in high-risk demographic groups wouldn't be penalized for the higher cost of their premiums.

Posted by: Athena_news | January 17, 2010 12:07 AM | Report abuse

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