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Taxing High-Cost Health Plans: Voodoo Economics for the Punditocracy?

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The biggest remaining progressive battle over health care reform hasn't yet been fought: the conflict between the House and Senate versions on how to pay for reform. Yet in the eyes of most editorial pages and policy wonks, taxing working families' benefits somehow makes more sense than taxing the rich.

Has this become the "voodoo economics" of so-called pragmatic moderates and administration economists? Like supply side economics, this could be a chimerical tax that, they believe, will magically rein in costs and pay for all health care reform without significantly cutting back on vital services for working families or raising their out-of-pocket costs.

Somehow, to those who remember it, it's all eerily reminiscent of earlier wishful thinking, a reverse version of the economic snake oil proffered by Arthur Laffer, who reportedly drew on a napkin the Laffer curve that set the stage for the lower taxes for the rich and ballooning deficits of the Reagan years. His cocktail napkin curve and rhetoric promised that lower taxes would spur productivity and raise government revenues -- while higher taxes would deter economic growth and lower revenues.

Unfortunately, even as the Senate's excise tax on benefits entranced most of Washington's opinion leaders like a shiny new Christmas toy, the prospects for liberal influence in the final legislation that passes both houses faced a new potential setback Monday. That's because of reports that the House leadership was considering skipping a formal conference with the Senate and working out an informal deal between leadership and staff of both houses.

Some Democrats spun this latest development as a progressive alternative: "The reasoning given by Democrats is that going to conference allows Republicans with multiple opportunities to block or delay the bill's ultimate passage," as the Sunlight Foundation summarized this development.

But a strong liberal champion of health reform, Rep. Raul Grijalva (D-AZ), co-chair of the Progressive Caucus, told me he found this prospect worrisome.

(You can read more about the battle among reformers and moderates over the Senate excise tax, and, as of Monday , the still little-noticed mounting concerns among progressive House members over skipping the formal conference altogether, here at the Working In These Times labor blog.)

"The idea of no formal conference is disappointing. A formal conference at least allows a variety of constituencies to give input and provide pressure on what's decided. The Senate is in the driver's seat, and our concern is that we're basically allowing the Senate bill to be dictated to us during negotiations," Rep. Grijalva said. He added that the current Senate bill misses key elements he and other progressives strongly support, including not just the faded public option but removing the anti-trust exemption, tough regulation of insurance companies in the states, and taxing the rich, not benefits as the Senate does. "If we're merely replicating the Senate, that's going to be a nearly impossible vote for me and other progressives," he says.

And without at least 20 votes from his 75 or so caucus members, "the party's over," he observes.

In fact, about 200 members of the House have already signed a letter urging rejection of the Senate benefit-taxing provision, but it's not at clear how many of them would vote against a final bill over this issue -- or what the labor movement's final stance will be on the legislation.

Just as Rep. Grijalva is challenging the emerging moderate consensus among Washington insiders for the excise tax, Bob Herbert, the liberal columnist for the New York Times, is one of the few high-profile columnists who has come out against the proposed tax in a scathing column called "A Less Than Honest Policy." Herbert zeroed in on the most glaring myths guiding those who support the tax (which is levied on employers but passed along in various punitive ways to workers). As Herbert observed, "Within three years of its implementation, according to the Congressional Budget Office, the tax would apply to nearly 20 percent of all workers with employer-provided health coverage in the country, affecting some 31 million people." So much for just taxing rich executives.

But Herbert points out how even its proponents don't really expect the $150 billion they hope to raise to come from the tax itself, since most businesses won't actually pay the 40% -- and will opt for cheaper, more limited plans that will deny employees some critical health services, including dental, vision and mental health care.

Herbert asks:

How will it raise $150 billion in a decade? Great question.

We all remember learning in school about the suspension of disbelief. This part of the Senate's health benefits taxation scheme requires a monumental suspension of disbelief. According to the Joint Committee on Taxation, less than 18 percent of the revenue will come from the tax itself. The rest of the $150 billion, more than 82 percent of it, will come from the income taxes paid by workers who have been given pay raises by employers who will have voluntarily handed over the money they saved by offering their employees less valuable health insurance plans.

Can you believe it?

I asked Richard Trumka, president of the A.F.L.-C.I.O., about this. (Labor unions are outraged at the very thought of a health benefits tax.) I had to wait for him to stop laughing to get his answer. "If you believe that," he said, "I have some oceanfront property in southwestern Pennsylvania that I will sell you at a great price."

The House bill taxes only the richest families -- those earning $1 million or more -- while the Senate version imposes a 40% excise tax on high-cost health care plans worth more than $8500 for an individual and $23,000 per year for families, with slightly higher amounts untaxed for those in high-risk occupations or over 55.

But even though the Senate bill only indirectly passes along the costs to workers, it's still clear to independent research firms like Mercer and government analysts, including the CBO and the Center for Medicare and Medicaid Services (CMS), that it would hit workers hard. As the CMS, no hot bed of union radicalism, said, "in reaction to the tax, many employers would reduce the scope of their health benefits."

Indeed, as the Watson Wyatt actuarial firm concluded, the impact of the benefits tax would fall disproportionately on people who already face high out-of-pocket costs, including people who live in high cost areas, women, older people, and people suffering from chronic diseases. "Taxing groups in high cost areas and with high cost members could make health care unaffordable for many families that currently have employer coverage," the Wyatt report said.

Yet somehow this tax on working families would "bend the curve" on health care costs. But according to a recent report by the respected Commonwealth Fund, "there is little empirical evidence that such a tax would have a substantial effect on health care spending."

So what's so striking in the dispute over this provision among progressives and other reformers, including on the blogosphere, is how untethered predictions for the measure by some of its supporters are to the existing evidence. As R.J. Eskow of the Campaign for America's Future, a health care expert and prolific blogger, points out in his criticism of other commentators, including the influential Ezra Klein of the Washington Post, backing the Senate tax:

My key take-away is this: The argument in favor of the tax is based on theory that's derived from long-term trends. The argument against it is based on concrete actuarial and economic studies, using actual benefit plan data and the stated intentions of real employers. To me that's a slam-dunk. Others disagree. That's why we should continue to have an open dialogue.

You can read more about the upcoming political fight over the excise tax, and disputes about the best strategies for progressives, at the Working In These Times blog here.