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Health reform's Chevy tax

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Wednesday, October 28, 2009

With Harry Reid's announcement Monday that he will send a bill containing a "public option" to the Senate floor, the biggest remaining difference between the pending Senate and House versions of health-care legislation may well come down to how to fund this $900 billion reform. On the House side, Speaker Nancy Pelosi has proposed that the lion's share of funding come from a surtax on the wealthiest Americans -- individuals who make more than $500,000 a year or couples who make more than $1 million. Pelosi's surtax would raise an estimated $460 billion, more than half of health reform's projected decennial cost.

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The Senate version contains no such surtax. Instead, the bill that emerged from the Finance Committee proposed establishing a tax on the more costly, or "Cadillac," insurance plans that employers provide their workers.

Unfortunately, that excise tax targets a lot of Chevy plans as well.

The Senate's tax would initially apply to all individual policies costing more than $8,000 a year, or $21,000 for a family. Those thresholds are to be indexed to the overall consumer price index (CPI) plus 1 percent. Problem is, medical costs and health insurance premiums increase a good deal more than the overall CPI. Since 2000, they have risen three to four times faster -- which means, more policies will be subject to the tax with each passing year. The congressional Joint Committee on Taxation has calculated that in 2013, when the reforms kick in, the tax will apply to 19 percent of individual plans and 14 percent of family plans, but that by 2019 it will sock 34 percent of individual plans and 31 percent of family plans.

Last time I looked, a third of American motorists were not driving Cadillacs.

Defenders of the Senate proposal point out that employers are not likely to keep buying the more expensive plans if this tax kicks in -- they'll opt for cheaper plans. Those cheaper plans, this argument goes, may require employees to cover more costs out of pocket, but employees will be better able to do that, at least part of the time, because money that had been paying for their plans would now go to them as higher wages. The rest of the time, they'll just be more careful consumers. And since workers will pay more taxes on their higher wages, the government's revenue to pay for the expansion of health care will be undiminished.

But will workers actually get higher wages to cover their new costs? This is an assumption beloved by economists. "There are a few things economists believe in our souls so strongly that we have a hard time actually explaining them," MIT economist Jon Gruber told The Post's Ezra Klein last week. "One is that free trade is good, and another is that health-care costs come out of wages."

There's certainly ample data showing health-care costs coming out of wages: A National Bureau for Economic Research working paper from 2005, for instance, showed that when employers encountered increases in health insurance premiums, two-thirds of the increase was paid out of lower employee wages and the remaining one-third was avoided by reducing employee benefits. As economists see it, this means that wages and benefits all come from the same pot that employers set aside for such things, so that as health-care costs decline, wages will rise.

But there's another way to interpret the data: that employers in our nearly union-free country have the power to impose health-care costs and cutbacks on workers, who have little or no power to resist. It follows, in this analysis and probably in life itself, that if employers opt for cheaper policies to avoid the excise taxes on more-expensive plans, their savings may not be passed on to workers as higher wages but simply kept by the employers. Out-of-pocket health costs for workers would rise, but into-pocket wage increases to cover those costs might not be forthcoming.

After all, economists also believe that productivity increases and overall growth in gross domestic product translate to higher wages, too, even though this has not been the case for many years. The successful war on unions, the American model of free trade and now a far-reaching recession have reduced worker bargaining power to trace levels, but the senators' version of health-care finance assumes that workers will pocket the benefits of a cost-conscious system. The senators assume wrong -- one more reason Pelosi's surtax is the better way to fund health-care reform.

meyersonh@washpost.com



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