A Promise Worth Breaking

Obama’s health insurance tax doesn’t go far enough.

President Obama’s proposed tax on especially expensive medical benefits, which he last week agreed to modify in response to complaints from labor unions, breaks at least three of his promises. It still may be the best aspect of a health care plan that otherwise does little to control costs, ostensibly one of Obama’s main goals.

As approved by the Senate, the 40 percent excise tax applies to medical coverage costs above $8,500 a year for individuals and $23,000 for families. Although those cutoffs currently are far above average, they would rise more slowly than insurance premiums, and the Joint Committee on Taxation (JCT) estimates the tax would affect nearly a quarter of Americans with employer-provided coverage by 2019.

This bracket creep is a feature, not a bug, because the aim is to reduce the incentive that encourages employers to provide tax-free medical benefits instead of higher wages. The more people are covered through work, and the more generous their coverage, the more they are insulated from the costs of their health care choices, a situation that impedes competition and feeds inflation.

Obama’s excise tax would nibble at the edges of this problem by encouraging employers to cut back on the most expensive health plans and shift the money they save to wages. In fact, the JCT projects that more than 80 percent of the money raised through this provision during its first decade would come not from the excise tax itself but from taxes on higher wages.

Which brings us to Obama’s broken promises. While running for president he repeatedly vowed not to raise taxes on families earning less than $250,000 a year. Yet the JCT’s numbers indicate that most of the money raised by the excise tax would come from households in that income group.

Last year Obama repeatedly assured the public that his health care plan would not affect people who are happy with their current coverage. “No matter how we reform health care,” he said in a June speech to the American Medical Association, “we will keep this promise: If you like your doctor, you will be able to keep your doctor. Period. If you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what.”

Yet the premise of the excise tax on “Cadillac” medical benefits is that some employer-provided health plans, because of their tax-free status, are excessively generous, making consumers less cost-conscious than they  otherwise would be. If it did not succeed in shifting people to different health plans—which might mean higher copayments, higher deductibles, and/or less comprehensive coverage—it would be a failure.

Finally, during his campaign Obama vowed to “change the way business is done in Washington” by eschewing special-interest lobbyists. Yet the deal he struck last week with the unions was a blatant payoff to supporters whose interests diverge from those of the general public. In addition to raising the excise tax thresholds, the compromise allows government employees and union members to escape the tax for five years longer than everyone else.

Since those employees are especially likely to have the “gold-plated” medical benefits at which the tax is aimed, the exemption further undermines what was already a timid, needlessly complicated attempt to deal with one of the health care system’s central problems: the separation of consumption from payment.  A better approach would be to make all medical benefits taxable while cutting tax rates or providing offsetting credits—something like what Obama’s Republican opponent suggested in 2008.

Obama condemned John McCain’s proposal, warning, “For the first time in American history, he wants to tax your health benefits.” But that was the same speech (the same paragraph, in fact) in which Obama made his “firm pledge” that “no family making less than $250,000 will see their taxes increase.” In the health care debate, Obama’s habit of reversing himself could turn out to be a blessing.

Jacob Sullum is a senior editor at Reason and a nationally syndicated columnist.

© Copyright 2010 by Creators Syndicate Inc.

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  • Suki||

    Good Morning reason!

  • Fist of Etiquette||

    This just in: Reason contributor advocates modifying taxpayer behavior through raising taxes on choices he and the government find undesirable.

  • ||

    Yeah, what the hell is the name if this web site?

  • ||

    should read....of this web...

  • Brian 2||

    More like undoing the ongoing government intervention that has entrenched employer-provided health insurance, which is one of the worst aspects of our current system.

  • Some Guy||

    Pretty much this. It could be better written as cap on the amount of tax-freeness you can have on a health care plan, though.

    I might almost prefer to have this tax personally if it would result in that chunk of salary that goes to health insurance (whether you get it or not) going directly to me.

    Far from ideal, but sometimes a band-aid on an arterial wound is better than nothing.

  • MJ||

    Combined with the other aspects of the bills that punish employers who do not provide employees health care insurance, it seems that the "Cadillac Plan Tax" is more a sop to the left's sense of egalatarianism than an attempt to divorce health insurance from employment. That some people get more benefits than others offends Dem sensibilities. And again, if the Dems wanted people to take care of their own health insurance they would extend the tax breaks to individuals not just businesses.

  • smartass sob||

    +1

  • mr simple||

    the aim is to reduce the incentive that encourages employers to provide tax-free medical benefits instead of higher wages.

    No, that's an unintended consequence at best. If they wanted this result they would extend the tax to all employee health coverage and not be trying to force companies to provide it for their employees. They just think that by using terms like cadillac plans they can convince people they are taxing the rich to give others a free lunch. They might even believe that themselves.

  • smartass sob||

    +!

  • smartass sob||

    1

  • thenino85||

    OK, "Jacob Sullum", where do you have the real staff of Reason tied up and gagged? Nancy Pelosi's basement?

  • Something's got to give||

    Libertarians can't have it both ways. You complain that health insurance is provided via employment and bitch that new taxes will discourage insurance through employment. Which is it?

  • Brown v. Obama||

    Neither. Get government completely out of the calculus.

  • ||

    Sure we can.

    (1) No tax breaks should be given to insurance through employers.

    (2) No special taxes should be imposed on insurance through employers.

    (3) No exemptions from special taxes should be given to favored constituencies.

    See, that was easy, and logically consistent.

  • ||

    We could eliminate the tax deduction given to employers that encourages them to provide insurance in the first place.

    That would simplify the tax code AND get people off employer provided insurance.

    The second alternative is to offer individuals the SAME deduction employers get for buying insurance.

    This excise tax is somewhere down the list at 7th or 8th best option, but it's still less undesirable than other parts of the bill.

  • ||

    Should health care related expenses be tax deductible?

  • ||

    No.

  • consistently inconsistent||

    R C Dean,no? In effect you would then be paying more taxes due to no tax deductible expenses. How do you like them apples?

  • P B||

    How about a consumption tax(Fair Tax) or a flat rate tax everyone pays no deductions for any thing. This way there is no possibility of teh gubmnt trying to manipulate us or pit us against one another.

  • ||

    Many libertarians, including myself, consider the fairness of the tax code (i.e. uniform treatment of all individuals regardless of lifestyle choices) to be more important than the overall tax rate.

    In other words, I'd rather see a slightly higher overall tax rate, if it was uniformly applied, without any exceptions, then the current mess of deductions and credits.

  • smartass sob||

    In other words, I'd rather see a slightly higher overall tax rate, if it was uniformly applied, without any exceptions, then the current mess of deductions and credits.

    That was already done once, back in the late 1980's. The government's overall take went up, many people's individual taxes went up, and the elimination of special credits, deductions, and "loopholes" did not last - they came up with new ones over the years.

  • ||

    Lemme guess, more empty speeches and broken promises?

    RT
    www.web-privacy.pl.tc

  • The Libertarian Guy||

    Taxing ANY health insurance is a bad idea. This was the result of wealth envy, pure and simple.

  • Suki||

    +1

  • anon||

    haven't seen anyone mention the pro-unionization effect this exemption would have.

    it's not just a payoff to current union members, all other things being equal, it increases the relative benefits (to the new members) of joining a union, or of unionizing a company.

    It's a union enrollment booster plan...

  • The Libertarian Guy||

    And, considering most of the job growth - and union-enrollment growth - is in the PUBLIC sector... the result is either a whole new crop of Democrat voters, or people coerced into voting same. Win-win for Barry & Co.

  • ||

    I just don't understand where they pluck these numbers from to define "Cadillac". My wife's insurance comes within a few hundred dollars of 8,600 and it's freakin' Kaiser Permanente. That's more like McDonalds insurance.

  • The Libertarian Guy||

    It's a slap at wealth. Poor people don't drive Cadillacs, unless they're old beater Cadillacs.

    Calling them "Buick insurance plans" doesn't have quite the same ring, either. It's all about marketing the product, which in this case is wealth envy.

  • Old Mexican||

    Obama’s excise tax would nibble at the edges of this problem by encouraging employers to cut back on the most expensive health plans and shift the money they save to wages. In fact, the JCT projects that more than 80 percent of the money raised through this provision during its first decade would come not from the excise tax itself but from taxes on higher wages.

    Switch and Bait - see Obama.

  • Hormonal Redhead||

    "Obama’s excise tax would nibble at the edges of this problem by encouraging employers to cut back on the most expensive health plans and shift the money they save to wages."

    If the tax is on the recipient of the insurance (i.e., the employee) - which is how I understand it - I don't see how this tax would cause employers to change anything. Maybe I don't understand the tax code, or insurance, or both, but it seems to me that it would encourage employees to pick the lowest-premium plan available to them (assuming there's a choice!), which most probably do, anyway. (When I worked for a company that provided insurance, that's what I did.) Employers would still have the existing tax incentive to provide "Cadillac" plans.

    Can anyone enlighten me?

  • Some Guy||

    Employers would get less of a benefit in attracting employees from such health plans if they came with a higher price tag.

    Government sticks and carrots are certainly a big part of why employers offer health insurance, but obviously it has to be something that your employees would want enough to be worth it in lieu of just giving them the money sans whatever tax breaks you'd miss out on.

    For example, UAW workers took giant raises instead of insanely giant raises in exchange for better health plans. With the tax in place (and no special favors), they would be less inclined to do so.

  • Chad||

    Since those employees are especially likely to have the “gold-plated” medical benefits at which the tax is aimed, the exemption further undermines what was already a timid, needlessly complicated attempt to deal with one of the health care system’s central problems: the separation of consumption from payment. A better approach would be to make all medical benefits taxable while cutting tax rates or providing offsetting credits—something like what Obama’s Republican opponent suggested in 2008

    Jacob: What insulated people from their health care costs is insurance, in any form, paid for by anyone. As long as it is insured, it will be overconsumed. The only way to combat this is to increase copays and deductibles, which "fix" insurance by partially destroying it. You can only go so far along this line before insurance fails to serve its purpose, which is to protect people from financial disaster if they get seriously ill.

    On the other hand, we DO have lower copays and deductibles than many other nations who have universal coverage. They are not incompatible in the least. For example, most services and drugs in Japan have a 30% co-pay. Due to generous out of pocket maximums, the Japanese pay about 16% on average out of pocket and would never go bankrupt. We pay only 12% on average, virtually assuring that we over-spend. Essentially, every Japanese has a guaranteed, high deductible plan. Doesn't this sound like a fair compromise?

  • Carter's Insurance Report||

    I really don't see how we as individuals can afford our share of this proposed tax. Times are tough all over. Where is this extra money really supposed to come from?

  • ||

    I beleive there is a real case to be made for Health Care reform. However; it is painfully obvious that true reform is the furtherist thing from what Obama and the Dems want.

    This is all about protecting the big unions, protecting the lawyers and increasing government control of our lives.

    Obama is a marxist and his agenda is to turn this into a socialist country.

    This is NOT the change you can beleive in, unless you are a communist.

  • SM||

    Wait...now we're supposed to like certain taxes? Or in certain cases taking my freedom is ok if it balances out in other ways? WTF are we talking about here?

    Freedom is not something that can be determined by evaluating concequences - either i'm free or i'm not. What happened to REASON here?

    We want them to tax as little as possible - not MORE. If they're going to be involved, we want them to be involved as LITTLE as possible, not MORE. Stop with the nonsense.

    I'm amazed how quickly people are willing to toss our reason and substitute concequentialism in its place...unreal...

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