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The Case Against the Health Care Benefits Tax

Jeremy Sprinkle
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Support Health Care for America NowBad politics, worse policy

The Senate health care "reform" bill raises revenue by taxing your employer-provided health insurance benefit. This excise tax will hit middle class families hard - particularly union households because our members are more likely to have health insurance through work.

Taxing health care benefits is bad politics, and it's the wrong way to pay for health care reform.

1 in 5 workers will be hurt by health care benefits tax

The Congressional Budget Office estimates 19% of workers will be affected in 2016 by the Senate's proposed tax on employer-provided health care benefits. The CBO figure is backed up by Mercer, the international benefits consulting firm, which found one fifth of workers will be hit by this tax as early as 2013.

The tax will get worse every year. The Senate bill uses an arbitrary dollar amount to decide which plans get taxed, but as premiums continue to skyrocket, more and more working families will get ensnared by this tax.

Hitting the tax threshold has little to do with generosity of benefits

Health insurance costs more to buy in some states than it does in others. Premiums are higher for businesses in certain industries than in others. The tax would affect many plans that have relatively high costs for reasons that have nothing to do with the generosity of benefits.

Actually, only 6% of the variation in plan costs can be explained by benefit design plus plan type (HMO, PPO, POS or high-deductible), according to a recent study published by the prestigious journal Health Affairs.

Employers will cut benefits to avoid the health care benefits tax

The Senate's benefits tax will mean higher insurance premiums because private insurers will raise rates to offset their higher tax liability. Most everyone who has health insurance through work can expect employers to avoid the tax by increasing cost sharing and offering junk insurance plans.

According to a Mercer survey of 465 health plan sponsors, 63 percent say they would cut covered benefits to avoid paying the excise tax, 23 percent would maintain their current plan and pass along the tax to their employees and only 2 percent would absorb the new tax themselves.

Tax violates pledge that workers can keep the plans they have

A central tenet of reform is that Americans who currently have coverage can keep the plan they have. The benefits tax will create incentives for employers to drop or severely curtail health insurance coverage - incentives employers are not likely to ignore - while making coverage through work more costly than ever. Keeping the plan you have through work may be harder than ever, if not impossible.

Benefits tax will not lower health care costs

A recent report by the Commonwealth Fund found that "there is little empirical evidence that such a tax would have a substantial effect on health care spending."

The key to reining in health care spending is to get providers to deliver care in more cost-effective ways. Increasing out-of-pocket costs for workers may actually lead consumers to forgo necessary care and make counterproductive health care decisions.

There were real cost control options -- like a publicly owned and operated insurance company to keep private insurers honest or drug re-importation from Canada where the same drugs are made in the same plants but sold for far less -- yet the Senate bill abandoned those measures. A tax on your health benefits is no substitute.

Benefits tax will not increase wages

Advocates of the benefits tax - including the White House - argue that workers will enjoy higher wages if health care costs are brought under control. They point to wage growth in the late 1990s, a period when health care costs rose more slowly than the explosive growth today, as proof.

However, the Economic Policy Institute has released a paper finding the logic behind this argument in favor of the tax is only skin deep:

The recent claims that trends in employer health care expenditures explain the beneficial wage growth of the late 1990s and the disappointing wage growth since 2000 does not hold up to any careful scrutiny. Health care expenditures are relatively small compared to overall wages, and an examination of the actual trends shows that health care cost increases do not correspond to the major movements in wages or compensation. This is especially the case for the wage trends of low- and middle-wage workers: their wages accelerated the most in the late 1990s and grew the least in the 2000s. The fact that these groups have the least participation in employer-provided health plans confirms that health care is not the major factor that the advocates of this new health care theory of wage determination would have us believe. There undoubtedly is a tradeoff between health care costs and wage growth, but this dynamic does not play a leading role in the drama of the stagnant wages facing workers for several decades and the inability of working families to benefit from rising productivity growth.

Furthermore, the Mercer survey of employers who provide health insurance through work found that "less than a fifth of respondents (16 percent) say they would convert their cost savings into higher pay."

There is a better way to fund reform, and it's in the House bill

The House bill gets it right. Instead of taxing benefits, it would raise revenue for health care reform by levying an surtax tax on the very richest income earners. Only individuals making more than $500,000 a year or families making more than $1,000,000 would pay - and then only on the difference between those thresholds and their actual income. Under the House bill, 97% of Americans would see not one dime in extra taxes because of health care reform.

The Senate's benefits tax would shift costs onto the backs of workers, it is unnecessary, it would be politically disastrous, and there is very little evidence that it would have a substantial effect on national health care spending.

For more information and sources used for this article, download the AFL-CIO's FACT SHEET: A Tax on Working Family Benefits (PDF).