The Baucus Excise Tax

So apparently Senate HELP Chairman Tom Harkin has been making some noise that there will be modifications to the excise tax on so-called “Cadillac” plans

In a conference call today hosted by Families USA, Harkin said the Democrats were likely to make “modifications” to the excise tax. Harkin said that the starting point for taxing such plans–currently $8,000 for individuals and $21,000 for families—was “too low” and said the minimum levels would rise. In addition, Harkin said that there were going to be exemptions to the tax made for individuals who had expensive plans because they had long-term chronic illnesses that required a lot of care, such as dialysis or certain cancer treatments.

For those of my readers who don’t religiously follow changes in health care legislation, the Senate Finance Committee’s bill removes the tax exemption on employer sponsored benefits at relatively high levels (as noted above, $8,000 for individuals and $21,000 for families). Currently, employer sponsored insurance isn’t taxed at all, which means that each dollar your employer pays in the form of health insurance is more valuable than a dollar paid in wages (these are taxed for Medicare, Social Security, and Federal and State taxes). The upshot is that companies offer increasingly generous benefits as a way of attracting employees, and drive health costs upward in the process by creating incentives for expensive and inefficient care.

The change proposed by the Finance Committee would simply reinstate the tax at the aforementioned levels, which would push employers away from offering these plans, thus serving as an effective cost control. In fact, it’s one of the key reasons — in addition to stingier subsidies and minimum benefits — that the Finance bill continues to control costs past the 10 year CBO window, and the House Tri-Committee bill explodes. What’s more, considering the average family health insurance plan is $13,375, this measure really wouldn’t impact a lot of workers. It would, however, impact union members who have increasingly bargained for generous health benefits, and accordingly, labor has been the most outspoken opponent.

Unfortunately, labor’s opposition is fairly short sighted. While this change could have negative consequences in the short term for certain unionized workers, part of the reason that unions have resorted to bargaining with benefits is because rapidly growing insurance premiums mean businesses can’t afford to increase wages. So by continuing to let health costs grow, the problem of wage stagnation will only continue — something decidedly not in the long term interest of unionized workers.

Back to the point at hand, Tom Harkin has suggested that Congress might “go outside the health care system for some revenues,” as the House has done with it’s tax on millionaires. Don’t get me wrong — I’m all for soaking millionaires — but the only way to make sure revenues stay apace with health care costs is to tack financing mechanisms to cost growth itself. Of course, the political calculus is a bit more difficult with 2010 elections coming up, angering organized labor is not a winning Democratic strategy, and considering health reform legislation won’t be enacted for several more years, the snub will ring with more salience than future savings in the health care system.

I guess I’m a little bit conflicted about all of this. Unquestionably, the Finance Committee is pursuing the right policy here, but on the other hand, going outside the system will only delay getting serious about cost control. That is, at some point, we’re going to need to address this — so if this is the only way to get health reform through in a politically palatable fashion, then so be it. Still, legislators who bleat about budget deficits — I’m looking at you, GOP — ought to consider insisting on this point.


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