Senate Majority Leader Harry Reid (D-Nev.) has pulled together a health bill that relies on three major revenue sources (and many smaller ones) to help support the cost of new insurance subsidies for those with low- and moderate-incomes.

Redi proposes $370 billion in new tax revenues over the next decade. $150 billion would come from a 40 percent excise tax on high-cost employer-sponsored insurance. Fees on makers of branded drugs and medical devices and on insurance companies would raise another $100 billion. Boosting the Medicare payroll tax by 0.5 percent on wages in excess of $200,000 ($250,000 for couples) would bring in another $55 billion. Among the cats and dogs: $15 billion from an increase in the floor on deductible medical expenses from 7.5 percent to 10 percent, and $6 billion from an excise tax on cosmetic surgery (the tummy tuck tax).

Reid picked very different revenue sources than the House. It would raise far more in taxes—about $540 billion through 2019. And 85 percent--$460 billion-- would come from a 5.4 percent surtax on incomes in excess of $500,000 ($1 million for couples).

A few thoughts on these proposals:

As I have written in the past, the House bill troubles me because it requires a few hundred thousand taxpayers--fewer than 1 percent--to pay for the bulk of health reform. That is bad economics and even worse governance. The Senate bill divides the burden somewhat more. While insurers would pay the excise tax on expensive employer-sponsored insurance, they would pass on much of the cost to workers. And the JCT estimates that middle-class employees would bear a substantial share (at least in an earlier version of the bill). Similarly, those taxes on drug and device makers as well as insurers will also be passed on, at least in part, to their customers, who are us. 

The higher Medicare rate in the Senate bill is merely another way to tax the wealthy. I’m a bit surprised that senators who so strongly opposed the income surtax are so quiet about the Medicare surtax. Thus, we’ve learned that the Senate is OK with a $55 billion tax hike on the wealthy but not with a $460 billion increase. It doesn’t take a rocket scientist to figure that the tab for the top brackets will come in somewhere between those two numbers when the final law is written. The neighborhood of $200 billion sounds about right.

The Senate would raise the floor on deductible medical expenses to 10 percent, except for seniors who’d get to keep the 7.5 percent floor. Anybody want to explain why catastrophic health costs are harder on a retiree than on a working family?

Finding the revenue to pay for health reform was always going to be a huge challenge. It still is, but we are beginning to see the outlines of a deal—a little income tax surcharge here, a dollop of insurance premium excise tax there, and more than a few cats and dogs. It may not really pay for the cost of insurance reform over next decade, but it will pass muster with the scorekeepers. And in Washington these days, that’s all that matters.          

 

In the ongoing search for money to pay for health reform, Senate Majority Leader Harry Reid (D-Nev.) reportedly wants to raise the Medicare payroll tax rate for high earners. It is not the best way to generate revenue, but it is not the worst either.

Today, Medicare collects a 1.45 percent tax on wages (plus an equal amount from employers). Unlike Social Security, there is no cap on wages subject to the Medicare tax.  One idea floating around: Raise about $50 billion over 10 years by hiking the Medicare rate by 0.5 percent for those making more than $250,000. You’ll recall that President Obama has foolishly exempted income below a quarter of a million dollars from any tax increases.

On paper some of this money may be allocated to the Medicare Trust Fund (due to be exhausted by 2017, according to the most recent trustees’ report). But with general fund money and payroll tax funds flying between Medicare and the rest of the budget at warp speed, this is mostly an accounting fiction. In truth, raising the payroll tax rate is little more than a backdoor tax hike on the very wealthy.

The idea of making payroll taxes progressive is interesting, to say the least. Today, the highest earning 20 percent pay a lower average payroll tax rate (6.9 percent) than those in the bottom 20 percent (7.3 percent). In recent years, Congress has raised Medicare premiums for high-earning seniors. Now, Reid may try to raise Medicare taxes for high-earning workers. 

And he might do even more. For years Democrats have toyed with the idea of imposing the payroll tax on income other than wages--capital gains and dividends, for example. Among other things, this would make it harder for high-earners to avoid the tax hike by changing the way they are compensated. But besides rendering the label “payroll tax” meaningless, this would be a big step towards making social insurance taxes indistinguishable from income taxes.

For years, the idea of hiking payroll taxes has been resisted by many on the left, who fear this step would break the social compact that has protected Medicare and Social Security from the pressures faced by means-tested entitlements. The more Medicare looks like welfare, the more jeopardy it will be in, goes this reasoning.

Now, however, in an effort to save the tax exclusion for employer-sponsored health insurance, unions seem enthusiastic about taxing wages of the rich. They may have noticed in the current health debate that few politicians are willing to risk their skins going after Medicare.

Of course, raising the payroll tax rate today to finance health insurance subsidies for working-age people will make it tougher to raise their tax later for other purposes (such as trimmin the deficit). But that, Reid probably figures, will be someone else’s problem.

The House health bill would pay for reform with a 5.4 percent income tax surcharge on individuals earning more than $500,000. Reid may try to get the cash by raising payroll taxes for many of the same people. No matter how Democrats structure this, they seem intent on making a small number of people pay the cost of health reform. I still think that’s a bad idea. 

   

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.   more »

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.    more »

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.    more »

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 »