Why the Health Insurance Excise Tax Makes No Sense
Posted by Avi Frisch on Tuesday, January 12, 2010
Under: Public Policy
I have written several times at Newjerseynewsroom.com about health care reform, which unfortunately is more about health insurance reform than a full reform of our health care system. The plan that is emerging is not good, but better than the status quo.
One aspect of the reform that is quite troubling is the excise tax on "cadillac plans." Unions strongly oppose this concept because they have traded salary for generous benefits for years and now will be taxed on those plans at 40% (assuming that insurance companies directly pass the 40% tax straight through to customers in their premiums). This has become a huge political problem for Obama, who most working families now realize is much more conservative than he had seemed to be during the primary campaign. Unions are the most important aspect of the Democratic Party apparatus and without strong union support, Congressional majorities (not just supermajorities) could be in huge trouble.
The political aspects of this are clear, and the excise tax will almost certainly get scaled back before the bill passes the House. But what about the economic justifications for this concept?
Economists state that employer paid insurance premiums come out of salary. This is true, but causing an increase in premiums will not give indiviudals any greater opportunity to choose plans, or give them a larger salary. Salaries may eventually catch up to where they would be without generous benefits, but it won't happen instantaneously. Furthermore, raising the cost of health insurance does not mean that you will force cost controls in health care, which is the ultimate goal.
The fiction that health insurance and health care are one and the same is one that has gone on for a long time, but it is just that, a fiction. Health insurance costs have little relationship to what they truly cover and even successfully limiting their rise will not force down payments for actual care.
In addition, the excise tax is going to be imposed nationally, with one threshold, without regard to the fact that certain areas of the country are significantly more expensive than others. Should you pay a tax because you live in New York or New Jersey? Should you pay a tax because you are at a small company with a relatively old work force, which therefore pays a lot for insurance?
One aspect of the reform that is quite troubling is the excise tax on "cadillac plans." Unions strongly oppose this concept because they have traded salary for generous benefits for years and now will be taxed on those plans at 40% (assuming that insurance companies directly pass the 40% tax straight through to customers in their premiums). This has become a huge political problem for Obama, who most working families now realize is much more conservative than he had seemed to be during the primary campaign. Unions are the most important aspect of the Democratic Party apparatus and without strong union support, Congressional majorities (not just supermajorities) could be in huge trouble.
The political aspects of this are clear, and the excise tax will almost certainly get scaled back before the bill passes the House. But what about the economic justifications for this concept?
Economists state that employer paid insurance premiums come out of salary. This is true, but causing an increase in premiums will not give indiviudals any greater opportunity to choose plans, or give them a larger salary. Salaries may eventually catch up to where they would be without generous benefits, but it won't happen instantaneously. Furthermore, raising the cost of health insurance does not mean that you will force cost controls in health care, which is the ultimate goal.
The fiction that health insurance and health care are one and the same is one that has gone on for a long time, but it is just that, a fiction. Health insurance costs have little relationship to what they truly cover and even successfully limiting their rise will not force down payments for actual care.
In addition, the excise tax is going to be imposed nationally, with one threshold, without regard to the fact that certain areas of the country are significantly more expensive than others. Should you pay a tax because you live in New York or New Jersey? Should you pay a tax because you are at a small company with a relatively old work force, which therefore pays a lot for insurance?
In : Public Policy
Tags: health care
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