The congressional fog is slowly parting and the fundamental issues of health reform are coming clear. And perhaps most controversial is the question of how Congress will pay for it all. Somebody’s taxes are going to be raised. But whose? And by how much?
Despite the whining about 1000-page bills, there are only a few big moving parts to health insurance reform. It will require insurance companies to sell to all, regardless of their health. It will mandate that everyone purchase coverage (a trade-off rightly insisted upon by the insurers). It will create exchanges to make it easier for people to buy in the non-employer market. And it will create subsidies to help make those policies affordable. Finally, Congress has to pay for those subsidies.
It would have been nice if reform also restructured the way Medicare delivers and pays for health care, but that isn’t going to happen—at least not this year. So, tax increases will be the piggy bank. It is, at bottom, a pretty simple calculation: The bigger the subsidy, the more people can afford to buy insurance. But the more help you want to give some, the more you'll have to tax others.
While the good folks at America’s Health Insurance Plans don’t want to say it, that is what they want out of a final bill. They want Congress to raise somebody’s taxes to encourage as many other people as possible to buy their product.
There seem to be three major options on the table: The House’s proposed income tax surcharge for those making more than $350,000 that would raise an estimated half-trillion dollars over the next decade; the Senate Finance Committee’s excise tax on high-value insurance policies that would generate about $200 billion over 10 years but far more down the road; and President Obama’s plan to cap the value of deductions for some high-earners that would raise about $250 billion.
The details of all three proposals are uncertain at best. The House leadership will rework the surtax so it applies to only the very rich (since those making $350,000 are pleading poverty); the Finance Committee’s definition of “Cadillac” plans is infinitely flexible, and Obama’s proposal will have to be dramatically restructured if it is rise from the political dustbin.
Still, the three ideas represent very different approaches to tax policy. The Finance panel would not only raise revenue but also modestly change the behavior of health care consumers. Although it would tax insurance companies, some share of the tax hike would be passed on to consumers, thus raising their costs and making them rethink the way they buy care.
The House surcharge is a rate increase in drag, and rate hikes are not an ideal way to raise money. This could be a particular problem since Obama would also restore the 39.6 percent rate for top-bracket taxpayers.
Capping the value of tax deductions is different business. It would broaden the tax base (though in an awkward way) by discouraging the use of incentives. That would raise taxes for those earning the most. And it may also change their spending patterns. For instance, an uber-rich home buyer might purchase a slightly smaller mini-mansion if the value of his mortgage deduction is capped at 28 percent.
I know Congress is writing a health bill. But, it turns out, it is also about to make some pretty important tax policy choices as well. We’d do well to watch closely.
