The House leadership seems convinced that a relative handful of people should pay for health reform. In the plan released yesterday by Speaker Nancy Pelosi, Democrats would fund most of the cost of insuring millions more people in two ways: cutting subsidies to Medicare Advantage plans and imposing a stiff 5.4 percent surtax on individuals making $500,000 and couples making more than $1 million.

TPC figures that just 400,000 taxpayers will pay that increase in 2011, less than three-tenths of one percent of all taxpayers. However, because the millionaire’s surtax is not adjusted for inflation (at least not yet), within a decade many more are scheduled to fall victim to the tax hike. By 2019, TPC figures nearly 800,000 would be in the bulls-eye, although that is still fewer than 1 percent of all taxpayers. Over the decade, the surtax is projected to raise nearly a half-trillion dollars. But because income subject to the surtax does not increase with inflation, annual tax revenues would grow from about $30 billion in 2011 to $70 billion in 2019

I am bothered by two elements of this. First, do we really want to put most of the cost of a national priority such as health care on the backs of a relatively few people? My concern has more to do with our social compact than economics, but wouldn’t it make more sense if we all had a horse in this race?  I know, those hit by the surtax are the same people who benefitted most from the Bush tax cuts in 2001 and 2003. But there is still something wrong with pretending that health reform is a free lunch for 99.7 percent of us. 

And I have another problem. My guess is the levy would become another Alternative Minimum Tax deal. That is, despite what looks like surtax-creep, there is a pretty good chance Congress would get cold feet somewhere along the way and protect many of those who would otherwise face the extra tax over the next decade. This would add tens of billions more to the deficit. 

I can hear lawmakers now. “This tax was never intended to hit these hard-working Americans earning just $500,000,” some pol will thunder in the run up to the 2014 elections. And on some level, I fear, that will be quite right.

By the conventions of budget scoring, of course, it doesn’t matter if many never pay the tax. The scorekeepers (JCT in this case) must assume the law will apply for 10 years. So, if this provision survives the next few months of congressional debate, Congress will be able to give itself credit for paying for health reform, never mind that would do so in a way that is irresponsible and very likely phony.  

As House and Senate leaders struggle to design their health reform bills, they remain at loggerheads over how to pay for broader access to insurance. The Senate Finance Committee’s plan to tax insurance companies that sell high-cost medical policies would generate over $200 billion in revenue over the next decade. But the excise tax is hugely controversial, mostly because influential unions oppose it.

A recent Joint Committee on Taxation analysis explains why. The JCT report, outlined in a letter to Representative Joe Courtney (D-Conn.), concludes that the Finance panel measure would increase taxes by an average of about 0.5 percent in 2013. But those making between $30,000 and $75,000 would face the biggest tax hike, just under 1 percent.

The tax would become much more painful over the next decade. By 2019, the Finance Committee plan would drive up average liability by 1.2 percent. But those earning $50,000 to $75,000 would face a stiff tax increase of 2.3 percent.

Here’s why: The cost of plans subject to tax would increase at the overall inflation rate plus one percentage point. But health costs, and thus insurance premiums, rise faster than that. So, gradually, more policies would be taxed. In 2013, the tax would hit roughly 4 percent of premiums. But in 2019, 11 percent would be taxed. 

But why should unions like the Communications Workers of America (the outfit that made the JCT report public) care?  Isn’t the tax being imposed on insurance companies? It is, but those insurers are not likely to swallow much of the tax themselves. Instead they—and the many large employers that self-insure—would pass the levy on to their workers by increasing the price of coverage. In some cases, workers would pay the higher premiums directly. If employers picked up the higher costs, workers would pay though lower wages. Or, employees may choose less expensive plans.They may get higher wages as a result, but that would add to their taxable income. Any way you look at it, workers will pay at least some of this tax. And their unions are not happy. 

The CWA did a little math and concluded that the Finance Committee plan would boost taxes by an average of about $900 in 2013, rising to $1,300 by 2019. For those in the $50,000 to $75,000 range, that tax hike would rise from about $800 to $1,200. However, by CWA’s calculations, only about 10 percent of taxpayers in that income range would pay the excise tax at all in 2013, rising to about 24 percent by 2019.

But keep in mind that these averages can be very misleading. Today, many working-class people have no insurance, either because they can't afford it, are uninsurable because of pre-existing health issues, or because their employers don't offer it. Thanks to other provisions of the reform bills, many of those earning less than $75,000 would enjoy new government subsidies that would make it possible for them to buy insurance for the first time. And low-income workers would get greater access to Medicaid. A chunk of these new subsidies, of course, will be paid by those hit by the excise tax.  

So, like most other pieces of health reform, there would be winners and losers even among those earning the same money. The question for the pols: Do they want to tax those with modest incomes and generous health insurance to help those with modest incomes and no insurance?  

Congress is absolutely right to end the decade-old fantasy that it wants to trim Medicare payments to doctors. This law has been on the books for 12 years and is annually ignored. Lawmakers should stop pretending. But I fear they will make this change without paying for it--adding $250 billion to the national debt over the next decade.

Failing to pay the bill will only perpetuate the dangerous illusion that we can have unlimited health care at no extra cost. This thinking helped bring us to the health care mess we face today. And at just the moment when it is trying both to reform the medical system and confront a $1.4 trillion deficit, Congress is setting an extremely dangerous precedent by closing its eyes to a huge and very real expense.

Next stop: the Alternative Minimum Tax. The AMT patch is the tax policy analogue to the doc fix. It exists under a similar illusion: Each year the AMT is poised to hammer an increasing number of middle-class taxpayers. And each year, like a latter day Perils of Pauline hero, Congress steps in at the last moment to save those voters by indexing the income levels at which the tax kicks in. But it never makes up a dime of the lost revenue.

I fear that one day soon, lawmakers will permanently index the AMT at a 10-year cost of $450 billion (nearly double the doc fix), and not pay for any of it.  President Obama has already started that ball rolling by including the lost revenue from AMT relief in his budget baseline. From there, it will be easy enough for Congress to wave its fiscal wand and permanently index the tax since it will show as costless, at least relative to the Obama’s artificial numbers.

But fiscal legerdemain aside, if those tax revenues are not made up somehow, the nation’s debt will continue to grow. And keep in mind that the 10-year costs of the doc fix and the AMT patch underestimate the long-run price tag. In 2019 alone, the changes would increase Medicare payments by $47 billion, and cut tax revenues by $70 billion.       

Pretending money grows on trees is what Washington does. Not so many years ago, President George W. Bush and a Republican Congress passed the Medicare Part D drug benefit, fought two wars, and slashed taxes without worrying about what any of it would do to the national debt. Now it is the Democrats' turn. Led by Senate Majority Leader Harry Reid (D-Nev.), and with the acquiescence of the Obama Administration, Congress is about to make the physician payment mess go away by wiping a decade of proposed spending cuts off the books, much like a business might write down a really bad investment.

But this isn’t just an accounting exercise. Medicare will need real money to pay the docs those additional fees—cash government will have to borrow from somebody.

Senators Kent Conrad (D-N.D.) and Chuck Grassley (R-Iowa) among others are looking for ways to pay for the doc fix. I hope they find one and can sell the idea to Obama and the Congress. Because if they don’t, this business could go viral, like some sort of fiscal swine flu.    

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.    more »

Democrats are proposing to control future Medicare costs, and Republicans are trying to stop them. Who knew? This could have been the perfect “Nixon in China” moment. Democrats—who created Medicare and for decades resisted GOP moves to curb the program—control Congress and the White House. A Democratic President has embraced modest efforts to slow the program’s unsustainable rate of growth. Drug makers, doctors, and hospitals all swallow hard and buy into the idea. It could be the perfect moment for a bit of desperately needed fiscal responsibility.    more »

Years ago, when I first started writing about health care, I came across a press release that said three new cardiac centers had opened in a Midwestern city and that, as a result, the costs of heart care in that town were expected to rise. This seemed contrary to all I had ever learned about supply and demand. But it was a powerful lesson. Health care economics, it turns out, is an oxymoron. The normal rules don’t apply.   more »

One of our readers, Kevin, wrote to say he was confused by my description yesterday of the premium subsidy in Senate Finance Committee Chairman Max Baucus’ health reform plan as a tax credit. “It sounds like a voucher to me,” he wrote. Sounds like a voucher to me too. Except it isn’t. The proposal would work like this: Everyone would be required to buy insurance, and low- and moderate-income people would get a government subsidy to help out with the premiums. The subsidy, however, is designed as a refundable tax credit paid directly to insurers. The size of the credit is based on an immensely complicated sliding scale.    more »

Lots for tax wonks to chew over in Senate Finance Committee Chairman Max Baucus’ health bill. The measure, which has yet to garner any Republican support, is already being called an opening gambit and is likely to be revised as it heads to committee markup next week. Still, it is an indication of how intertwined tax and health policy have become in recent years. Here are some of the key provisions:    more »

As rhetoric, President Obama’s speech last night was an A+. As policy, it was the clearest description we’ve yet heard of what he really wants. As a step towards getting a bill passed...we’ll see. Here are some thoughts about what the President said. After a summer of confusion, Obama told us what he wants health reform to look like: Everyone would be able to buy insurance at a reasonable price, regardless of health status; everyone would have to purchase coverage; government subsidies would be available to help many (though not all) of the uninsured buy coverage; and any bill would be fully funded. This is insurance restructuring, not system reform. Still, if Washington can pull it off, it would be a very impressive achievement.    more »

Before you give up entirely on the idea of health reform, take a look at the Healthy Americans Act, a broad-based reform bill with some interesting tax provisions sponsored by senators Ron Wyden (D-Ore.) and Robert Bennett (R-Utah).    more »

It is interesting, and perhaps worth noting, that while political opposition seems to be hardening against the $1 trillion, ten-year cost of the early versions of health reform, barely a peep of concern has been raised about the $3 trillion price tag for President Obama’s plan to extend most of the Bush-era tax cuts.    more »

I’ve been struggling to understand the overheated rhetoric surrounding the proposal that allows Medicare to pay for end-of-life counseling. I think I get it now: It is all about the death tax. Here is the story the government doesn’t want you to know. The 2001 Bush tax cuts will repeal the estate tax next year, but only for a year. Starting in less than 18 months, estates in excess of $1 million will once again be taxed at a stiff 55 percent. This will cost the children of the very wealthy tens of billions of not-so-hard-earned dollars. And it creates a huge incentive for these offspring to, shall we say, accelerate nature’s course. You see where I'm going here.    more »

As Congress and the administration grope their way toward healthcare reform, a major obstacle is financing: how do we pay the $1 trillion cost over the next decade? Many economists and members of Congress favor reducing or eliminating the tax exclusion of premiums paid for employment-based health insurance (ESI). We owe no income or payroll tax on the premiums our employers pay. The exclusion will cut an estimated $240 billion from federal revenues next year and $3.5 trillion over ten years. And it hits state tax collections too.    more »

Imagine you are a successful business owner confronting the House Democrats’ proposed tax rate hike. Your first question: How do I shelter as much of my income as possible? Will one answer be to buy the richest, most generous health insurance policy you can find? It only makes sense. Why take cash compensation that could face a top rate of more than 45 percent when you could easily get more tax-free health insurance? Forget Cadillac plans. Now we’re talking Lamborghini coverage.    more »

Now we know how many American taxpayers will be asked to pay for health reform under the new tax rate structure being designed by House Democrats: about 2 million. That would be a bit more than 1 percent of all taxpayers. They’d be asked to pay an additional $540 billion in taxes over the next 10 years, while those making less than $350,000 would be asked to contribute approximately nothing. Seems fair to me. According to the draft House bill, starting in 2011 those making more than $1 million would pay a surcharge of 5.4 percent. Add that to President Obama’s plan to restore the pre-Bush top rate of 39.6 percent and the new maximum marginal rate would be an even 45 percent. You can also add a couple of extra percentage points thanks to Obama’s plan to restore the pre-Bush limits on personal exemptions (PEP) and itemized deductions (Pease).    more »