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McCain’s Health Care Tax Plan Is Not Budget Neutral

2 min readBy: Gerald Prante

Following last week's vice-presidential debate, I pointed out that Sarah Palin was wrong in claiming that John McCain's health care taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan was "budget neutral." In fact, Tax Policy Center and the Tax Foundation have estimated that it's a tax cut over the next ten years in the area of $1.3-$1.4 trillion. has verified this as well, but that led John Lott (author of Freedomnomics and More Guns, Less Crime) to argue that the fact-checking on this by was wrong. And he used a separate Tax Foundation study to supposedly verify his claim. Unfortunately, the Tax Foundation study he cited doesn't support his claim.

Specifically, Lott said this: criticizes Palin for claiming that McCain’s health care tax credits will be "budget neutral" – they argue that the tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. will be larger than the new taxes that the program will impose. Fine, but if the people at believe that is true and that the Tax Foundation is wrong, Biden’s claim about increased taxes is even more inaccurate. But doesn't even mention Biden’s statement from the debate.

Lott is correct to say that it is not a tax hike as Biden claims, but to say that and the Tax Foundation are conflicting is incorrect. The link he provides to the Tax Foundation said this about McCain's health care tax plan and its costs:

Another concern with the McCain health credit is that it increases the net subsidy for health care by $1.4 trillion (as discussed above) and, all else equal, might well encourage greater health care spending. The success of the policy depends critically on whether the benefits from improved efficiency—reducing the linkage between the tax subsidy and health care spending—exceed the effect of increasing the overall subsidy for health care. This potential shortcoming could be remedied by also eliminating the current payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. exclusion for employer-based health insurance premiums. This change would also make the overall policy roughly deficit-neutral over ten years.

Lott misinterpreted this statement to mean that McCain's health care tax plan is budget-neutral when in fact the report is just saying that it would be budget neutral IF the payroll tax exclusion was eliminated as well, which it isn't under McCain's plan.