A Tax Even Its Defenders Can’t Love

January 12, 2010

People are saying that the so-called Cadillac tax “might fall flat” and “has real problems.”  And those are its defenders.  I can’t remember any new policy in recent history whose own advocates had so many complaints with its design.

Not that we’re  “Ezra Klein Watch” around here, but Ezra’s become the locus and the spokesman for the pro-tax contingent. He’s mounted a yeoman’s defense, using a broad (if what occasionally seems to be shifting) array of arguments.  Not that all of his points are without merit, by any means.  He and other tax proponents have raised compelling arguments that merit serious discussion.  Unfortunately, they don’t have much to do with this tax.

The debate shifted after studies (by Gabel et al. and the Milliman actuarial firm) showed that “richness of benefits” is not what would place most health plans into the tax.   It mainly targets benefits for older, sicker people, those than live in the wrong part of the country, or those in the wrong industry.  Then we learned that yes, employers will cut benefits if the tax is passed, but no, workers won’t get the money their employers save as wages.  Two consulting firms (Towers-Perrin and Mercer) confirmed overwhelmingly that companies intended to keep the money instead.

Sure, reducing overall health costs would free up more money for wages in the future.  But nobody’s explained how this tax would reduce overall costs. All we know is that these workers, whose coverage would be cut now, would  get nothing in return.  Meanwhile there would be a lot of unfair suffering – suffering to which the tax’s defenders seem uncharacteristically indifferent.  “No one should be under the illusion that this tax will not cause some pain,” writes Ezra.  “Everything has losers.”

So if your coverage gets cut because your co-workers are too old or too sick, take comfort:  Everything has losers.

Ezra acknowledged the problems during an online exchange we had recently.  “My argument is not that the excise tax is without problems, or sure to work,” he said then, “(a)nd I don’t deny that (it) might fall flat.”  But he’s still pushing for it.

“The excise tax is a tax that’s meant to change behavior,” he writes, “much like a cigarette tax.” But a cigarette tax taxes cigarettes. This tax doesn’t target inappropriate or excessive use of health services.  It taxes everything. It’s like cutting working families’ grocery budget with the rationale that “some of them might buy cigarettes with that money.”   It’s a blunt instrument where we need a  scalpel.

A “cigarette tax” approach to benefits would require a national discussion of “basic” vs. “optional” coverage  – ie, is vision coverage obsolete? – or some other creative ideas.  Maybe we should tax services that fall outside of accepted medical practice standards, or tax providers if they deviate too often from best practices.  (I’m not endorsing these ideas, merely listing some alternatives.)

Ezra also voices an argument I’ve heard privately from some health economists: “(A)ll employer-based insurance, right now, is exempt from taxes — a regressive and cost-increasing decision that this barely begins to redress.This is a tax that should already exist, and it should exist on every dollar of health benefits, not just every dollar above $23,000.”

It’s a legitimate point.  Our employer-based system is an historical anomaly, one that treats some forms of employee compensation differently from others.  That’s inherently unfair.  But the wage levels we have today are the product of this system.   They’ve grown up together with these  benefits, like tangled vines.  If we were to make a national decision to tax health coverage – an idea that was  mocked when Republicans suggested it – we would need to have a well-thought-out transition plan.  Otherwise we’d have an enormous de facto wage cut for our already-beleaguered middle class.

If we’re not willing or able to do that for the country as a whole, why select a portion of the insured workforce – on a discriminatory basis, no less – and do it to them?

Paul Krugman reluctantly endorsed the tax while simultaneously criticizing it:  “A flat dollar limit to tax deductibility has real problems. At the very least, the limit should reflect the same factors insurers will be allowed to take into account in setting premiums: age and region.”  There’s a genuine imbalance here:  The Senate bill allows insurers to charge up to three times as much for older people’s coverage, but raises the tax’s trigger point by only 13% for workers over 55. (And, to clarify, that’s for retired workers.  An active workforce with a a higher percentage of older employees will still be unfairly hit.)

Prof. Krugman insisted that “the final bill should address the criticisms.”  Amen.  That goes beyond Prof. Krugman’s proposed modifications to the tax design. WHile they would relieve the most egregious discriminatory effects of the bill, they still wouldn’t address the fundamental problem:  This tax doesn’t target excessive care.

That gets us to the last line of defense:  that this tax, however flawed, is a first step toward genuine cost containment.  But nobody’s explained how it would contain costs, and insurers have always responded to increased expense by shifting costs back to patients – not by getting smarter.  Why does anyone think a badly designed tax that causes indiscriminate pain will evolve into something better?  The most likely outcome is a backlash that makes genuine cost containment impossible for a generation.

There are good proposals, there are bad proposals, and there is the proposal on the table today.  The tax’s defenders have come up with some interesting ideas – or at least the germ of some interesting ideas.  But those ideas aren’t the table: this tax is.  Let’s not settle for a  flawed idea.  Let’s implement something that works.

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One Response to “A Tax Even Its Defenders Can’t Love”


  1. [...] Sentinel Effect – A Tax Even Its Defenders Can’t Love [...]


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