Scott Brown and the Cadillac Tax

January 20, 2010

What does the election of Scott Brown mean for the new taxes impending in the health care reform bills? Among the speculating pundits last night, many thought the only possibility for quick passage was for the House to swallow its pride and accept the Senate-passed bill lock, stock and Cadillac tax.

Several TV pundits said liberal Democrats in the House would be unwilling to accept the Senate bill, possibly because government control of insurance isn’t as strict. But Chris Matthews had a different take. He recalled the recent visit of union bosses to the White House where they extracted from President Obama a sweetheart exemption from the Senate’s excise tax (the so-called Cadillac tax) for their members.

That deal, along with other changes the House and Senate had bargained over, would have to be scrapped if the Senate-passed bill is to be forwarded straight to the President’s desk. The Cadillac tax would revert to its original terms: every health insurance company would have to pay a 40% tax on each dollar that its policies exceeded $8,500 in value for an individual or $23,000 for a family (except for police and firefighters’ unions—they got their sweetheart exemption into the Senate-passed version).

Unions have bargained for extraordinarily generous health insurance packages, so the idea of incurring taxes on them was anathema. Normally, unions don’t acknowledge that taxes on corporations hurt the people who buy the corporations’ products, but in this case they made an exception, declaring that insurance companies should not have to pay tax on union insurance for fear that it would make the coverage more expensive.

Since the average family health insurance policy is well below the limit, costing roughly $12,500, most people’s health insurance policies would not trigger the tax. As a result, it was never projected to raise a massive amount of tax revenue, “only” $150 billion over ten years.

The excise tax was clearly the least economically damaging tax in any of the health reform bills, so if Matthews is correct that union opposition to it will be decisive in killing the last chance for the current health reform bill, it’s a sad commentary on the nation’s tax policy priorities.

It’s not as if the Senate bill was a good one just because it had one arguably meritorious revenue-raiser. Much more of its spending was financed with Medicare cuts that were unlikely ever to be enforced, leading to deeper national debt. Also, the Senate bill included large subsidies to families earning up to the surprisingly high amount of $88,000, and the phase-out of those subsidies would have hit tens of millions of families with what economists call high marginal tax rates. That is, when families earned more, they would not only bump up into higher tax brackets, but they would lose their subsidies as well, and the combined effect could be equivalent to a tax rate over 70%. This would have created insidious and damaging incentives for middle-income workers.

The tax policy key to the entire issue is still, and always will be, the distortions in the health care economy caused by the tax exemption for employer-provided health insurance. For decades we’ve granted a double tax exemption—forgiving income taxation and Social Security taxation—on that vast flow of workers’ income, causing union and even non-union workers to demand super-expensive health insurance instead of higher wages.

Since I opened this post by quoting TV pundits, it’s only appropriate to close with a potshot at each party on the subject of health insurance reform.

Potshot at Republicans: Right-leaning pundits say their big idea for expanding health insurance is to bring down the price by allowing people to buy policies in other states, which is currently forbidden. And it’s true that many states have enacted outrageously expensive requirements that every policy issued in state must include coverage for frivolous “medical” care such as aromatherapy, but where were Republicans with this idea when they were running the show?

Potshot at Democrats: Since the real problem is the unjustified tax exemption of employer-provided health insurance, why haven’t leaders proposed getting rid of it? The answer is political demagoguery: when John McCain proposed a super-progressive reform that included scrapping the exemption, one that liberal think tanks had championed, the Obama campaign decided that political warfare was more important than bipartisan policy. They called it “taxing health care” and published ads like the one below, implying that voters’ children would die if McCain’s proposal became law. Ironically, now the Democrats are failing in their own attempts to “tax health care.”


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