A Tale of Two Taxes

For those who've been watching health care reform closely, it's long been clear that, with the possible exception of abortion funding, the biggest difficulty in reconciling the House and Senate versions of the bill would be the financing. Funds freed from Medicare cuts (which many view with skepticism) will only "pay" for a portion of the nearly $1 trillion in new spending expected over the first 10 years of the bill. That means that in order to fund the rest of the bill's new spending, Congress has to rely on additional taxes and fees. But the two bills do so in very different ways.

The House raises a significant amount of revenue to pay for the bill through a tax on high-earners — couples who earn more than a million dollars a year and individuals who earn more than $500,000. The Senate version, however, generates money through a 40 percent excise tax on so-called "Cadillac" health care plans — health and dental insurance that totals more than $8,500 for an individual or $23,000 for a family. 

Right now, the Senate's excise tax is expected to win out, in part because the Senate's 60-vote coalition is more fragile, and in part because President Obama supports the provision. This creates two difficulties for Democrats. The first is that, because that tax would hit millions of middle-class families, it breaks Obama's promise not to raise taxes on those making less than $250,000 a year. Given Obama's casual willingness to break campaign pledges, though, this is the lesser issue.

The bigger problem is that the excise tax has labor leaders absolutely livid.  Over the years, many of their members have forgone additional wages in order to secure expensive benefits packages that the excise tax would penalize. They haven't yet said publicly that they're ready to kill the bill, but they're letting the White House know that they're very, very unhappy:

President Obama told labor leaders in a tense two-hour closed door tussle over whether to tax health care benefits that he backed the tax, which labor leaders vehemently oppose, but also supports efforts "to protect working men and women."

Their problem? Labor leaders say you can't have it both ways. Some now openly accuse Obama of doing that and violating one of his most important early promises in the health care debate: that if you like the coverage you have, you will be able to keep it.

…"The senate bill instead drives a wedge between the middle class and the poor," [AFL-CIO President Richard] Trumka said in a speech at the National Press Club just hours before the White House showdown. " The senate bill taxes the middle class by taxing workers health plans. The Senate bill pits working Americans who need health care for their families against working Americans trying to keep health care for their families. Now this is a policy designed to benefit elites."

Significantly, Trumka did not threaten to torpedo health care reform if the Senate excise tax survives intense negotiations with House Democrats over a final bill.

This is a serious problem for Obama in specific and for Democrats trying to pass health care reform in general. But I don't think it's unresolvable. Throughout the course of the health care debate, Democrats have shown a willingness to bribe buy off negotiate with any individual or organization that stood in the way of their plans. And it looks like that's just what's going to happen here. From TPM's report on the meeting between labor leaders and administration officials: 

"My understanding it was really discussions surrounding policy fixes that could, to at least try to delay the impact and look at maybe raising the threshold a little more," said one top labor official briefed on the meeting. 

"Secretary Sebelius was there for part of the discussion," the official went on. "They are exploring, at least, some modifications that might take into account some collectively bargained plans, maybe trying to tie some exclusion for plans that are covered by a collective bargaining agreement."