Abstract: The individual mandate in the Baucus health
care plan would impose punitively high, regressive taxes on
low-income and moderate-income working families. Its penalties and
additional taxes on business would discourage companies from hiring
or continuing to employ low-income and moderate-income workers. The
plan would substantially raise health insurance premiums. Yet the
plan would still leave millions of Americans without access to
affordable health insurance. Adding to their misfortune, it would
then punish them with a tax penalty precisely because they are
uninsured.
A key component of the health care plan released by Senator Max
Baucus (D-MT) on September 16 is its individual mandate--a legal
requirement that nearly every American obtain health insurance or
face substantial tax penalties.
The mandate would be implemented through new requirements for
employers, a new system of state-based health insurance exchanges,
and the IRS, which will impose tax penalties on the uninsured and
share personal financial data with employers and health insurance
companies.
While making health coverage available to all Americans is an
admirable goal, the structure of this particular mandate severely
restricts customer choice and imposes a punitive and regressive
financial burden on those with the least ability to pay. In effect,
the Baucus plan would tell the working poor: "If you have been
choosing between food and health insurance, you no longer have that
choice. You must buy the health insurance, and we will decide what
kind of health insurance you will buy and how much you will pay for
it."
The Individual Mandate and the Tax
Penalty
Under the plan,almost everyone who is not covered by a
government health program would be required to purchase health
insurance starting in 2013. The documents that Senator Baucus has
released do not specify the coverage requirements except in the
vaguest terms, so accurately estimating the premium cost is not yet
possible. Pending amendments suggest that no coverage requirements
will be specified in final legislative language and the details
will be left to the discretion of appointed officials after the
bill is passed.
However, it is clear that almost everyone will be required to
obtain coverage, and most will be required to pay for it. The
mandate will apply to all adults on behalf of themselves and their
dependents under age 18. The mandate will apply to 18-year-olds,
even if they are still in high school and unable to secure a
full-time job without dropping out. The plan would make exceptions
for religious objectors, for undocumented aliens, and possibly in
some "hardship" cases if approved by the Secretary of Health and
Human Services. However, everyone else would be required to
purchase insurance chosen by their employer or approved by a state
government-sponsored "exchange."[1]
Those who do not purchase insurance would face a heavy annual
tax penalty. Those with incomes between one and three times the
federal poverty level (FPL) would face a penalty of $750 per person
up to $1,500 per family. This penalty could apply to individuals
with incomes as low as $10,831 per year. The penalty for those with
incomes above three times FPL would be $950 per person with a
maximum of $3,800 per family.[2]
Implementing the Mandate
Those who do not qualify for government health plans or have
access to an employer-sponsored health plan would be required to
purchase coverage through a state-sponsored "exchange." (It would
be possible to purchase health plans outside the exchanges, but
plans would have to meet all requirements of the exchange
regardless of how they are purchased.) Employees who are offered
only single coverage at work would be required to purchase coverage
for their dependents under age 18. Otherwise, they would pay the
tax penalty.
People whose employers offer health plans would be required to
enroll in their employer's plans, unless they can prove that they
are already covered through a government program or a family
member's employer-based plan. This would force most employees to
choose only plans offered through their workplaces.
The Baucusplan makes an exception for employees whose share of
the premium exceeds 13 percent of their family income (not just
income from that employer).[3] They would be permitted to opt out of their
employer's plan and purchase insurance, perhaps receiving an
income-based subsidy if they purchase through the exchange.
Families with incomes below four times the FPL that are
ineligible for Medicaid (roughly, those with incomes between
$29,330 and $88,200 for a family of four) would be eligible for
premium subsidies in the exchange. The subsidy is calculated so
that the net cost of a standard plan (details unspecified) with an
actuarial value of 70 percent (70 percent of what is unspecified)
would range from 3 percent of income at the lower end (1.33 times
FPL) to 13 percent of income for those with incomes between three
and four times the FPL.[4] These subsidies would not be available to
those with access to employer-sponsored insurance, except in the
case described above. In companies with more than 50 employees that
do not offer employer-sponsored insurance, the average cost of the
premium subsidy[5] would be charged back to the employer as a
tax--a portion of which would be inevitably passed on the employee
in the form of lower wages.
Taxing the Sick
The Baucus proposal includes several provisions that will impose
higher taxes on taxpayers who need more health care, regardless of
income level. It imposes an "Annual Fee on Manufacturers and
Importers of Medical Devices," which amounts to an excise tax on
all medical devices priced over $100, including everything from
wheelchairs and walkers to pacemakers, hearing aids, and MRI
scanners.[6] There is a similar annual fee on health
insurance companies, clinical laboratories,[7] and manufacturers
and importers of branded drugs. All of these annual fees would be
passed on to consumers in the form of higher prices and, in the
case of devices and drugs covered by insurance, in the form of
higher insurance premiums.
These annual fees (that is, taxes) total over $13 billion and
would be allocated according to market share.[8] Yet the true impact
would be higher because the taxes paid would be treated as profit
for corporate income tax purposes. The results could increase the
effective tax to as much as $17.6 billion. This may result in
money-losing companies paying tax on "profits" they do not actually
have.
Some provisions tax those who need health care, but only if they
make enough to pay income taxes. For example, it would reduce the
cap on income that can be placed tax-free into a Flexible Spending
Account (FSA or "cafeteria plan") from $5,000 to $2,000.[9] In
addition, it would raise the threshold for itemized deductions of
medical expenses from 7.5 percent of income to 10 percent, further
penalizing those with high medical expenses not covered by
insurance.
Another provision would increase the threshold for deducting
excessive medical expenses for income tax purposes. Currently,
medical expenses (other than those paid pre-tax through an
employer) that exceed 7.5 percent of adjusted gross income are
deductible. The Baucus proposal would raise this threshold to 10
percent. This would raise taxes on more than 6 million households
that face high health care costs, about half of which have incomes
low enough that they would qualify for the subsidies these taxes
are intended to pay for.[10]
The revenue from these taxes is intended partly to offset
premium subsidies for households with incomes below four times the
FPL, but these taxes would be imposed on Americans who need medical
devices or prescription drugs, have high out-of-pocket costs, or
pay their own health insurance premiums. In effect, the Baucus
proposal would tax the sick to subsidize insurance for the healthy,
and many of the taxes would be imposed on the same people "helped"
by the subsidies.
Taxing Low-Income Workers
The Baucus proposal imposes a partially hidden, substantial tax
burden on those who can least afford to pay. First, workers offered
insurance through their employer on a pre-tax basis would be
required to purchase it, unless their share of the premium exceeds
13 percent of income.[11] This could impose substantial hardships
on low-wage workers in companies with generous (i.e., "expensive")
health plans. Because employers are required by law to offer the
same health insurance options to all full-time employees,
low-income workers in mostly high-paying companies (for example,
support staff at a law firm) would be at a substantial
disadvantage. They could be required to purchase insurance designed
and priced for upper-income people, even if the premium nearly
exhausts their paychecks.
For example, someone who earns $15,080 per year before taxes by
working 40 hours per week at the minimum wage could be required to
pay $1,960 for a generous individual health plan or even more for a
family plan. A minimum-wage worker could be required to pay almost
20 percent of his or her income in payroll taxes and mandatory
health insurance. This employee would not even have the option of
declining the health insurance and paying the $750 penalty, since
employees would not be allowed to opt out of their employer plans
unless they could prove they had other insurance. In effect, the
worker would be forced to buy an expensive health insurance plan
instead of other necessities, such as food and rent.
Furthermore, if the value of the employer-offered plan exceeds
$8,000 for an individual or $21,000 for a family,[12] the employee
would be subject to a 35 percent excise tax on the amount above
those limits. This tax rate is much higher than the income tax
rates that most families pay on regular income. Figures from the
Current Population Survey and the Medicare Expenditure Panel Survey
show that more than 570,000 families that pay no income tax or are
in the 10 percent income tax bracket would be subject to this
punitive 35 percent tax on "excessive" health benefits. More than
7.2 million households--almost 94 percent of those paying the
excise tax--would pay higher taxes on their health insurance than
on their income.[13] Of course, because purchasing the
insurance would become mandatory, those numbers could become even
higher if this proposal becomes law. (See Chart 1.) A full-time
minimum-wage worker with a generous employer-paid plan could be
forced to pay hundreds of dollars in excise tax even if the
employer paid the entire health care premium.
An amendment proposed by six Democrats on the Senate Finance
Committee--which Chairman Baucus has recommended accepting--would
make the excise tax 40 percent instead of 35 percent. If this were
adopted, all affected taxpayers would pay a higher tax rate
on health insurance than on regular income.
A worker whose share of the premium for employer-based insurance
exceeded 13 percent of family income could opt out and purchase
insurance through the exchange, but this would generate a hefty tax
bill for the employer, which would either be passed on to the
employee in the form of lower pay or endanger the employee's job.[14]
Low-income and moderate-income workers who purchase health
insurance through the exchange rather than through an employer
would be in a different, yet potentially more oppressive situation.
Companies with more than 50 employees that do not offer health
plans would pay a special tax to "reimburse" the government for the
premium subsidies provided to their employees through the exchange.
This tax would add to the cost of hiring and retaining these
employees, and the money would have to come from somewhere.
Businesses do not have unlimited funds to dole out based on
their own beneficence or the government's instructions. They must
pay all employment-related costs out of payments received from
customers for their employees' work. To pay the taxes to subsidize
health insurance for their employees, they would likely be
compelled to reduce the pay of those same employees--in effect,
making the employees pay for their own subsidies. Even worse,
employers who lack enough revenue to pay minimum wage plus the cost
of other benefits and the new taxes would be forced to lay off
their lowest-paid employees to comply with the law.
Curiously, the tax will not affect all employers equally. Each
employer's tax would be the total cost of the subsidies for its
low-income and moderate-income employees or $400 for each full-time
employee, whichever is less. For an employer with mostly low-income
employees, hiring another would increase taxes by only $400.
However, an employer with mostly high-income employees would pay a
tax equal to the average subsidy in the exchange to hire a
low-income employee. This average would be calculated annually and
would likely amount to thousands of dollars. At the margin, the
penalty would be the harshest for companies with many higher-income
employees who hire or continue to employ lower-income support
staff. The inevitable result would be that these companies would
lay off lower-income workers or reduce their hours to less than
full-time, and companies with mostly low-income employees would be
forced to downsize or cut wages to make up for the new taxes.
The Baucus plan would have another, even stranger effect on
hiring. Because the subsidy amount is based on family income and
family size, not the wages that the employer pays, employers would
naturally prefer to hire workers from higher-income families with
fewer children. For example, hiring a single parent could incur a
substantially higher tax penalty than hiring a worker with a
working spouse or parent(s), or a worker who is single and
childless. Business would be discouraged from hiring those who need
the jobs the most.
Mandatory Loss of Privacy
Taxing employers based on employees' family income would require
informing companies of their employees' family incomes from other
sources. Employers would have to be provided with this information
so they would know how much tax to pay, even if their employees do
not want to provide the information. Furthermore, employers could
use this information to discriminate against workers from
low-income families--precisely the people who need the jobs the
most.
In addition, subsidies provided in the exchange would be
transferred by the federal government directly to insurance
companies, who would bill policyholders only for the remaining
premium, based on income. To make this system work, health insurers
would need to be provided with information on the family income of
their policyholders, even if those policyholders wish to keep that
information private.
To enforce these provisions, the bill would therefore require
individuals, health insurers, employers, and government health
agencies to report detailed health insurance information on all
Americans to the IRS, adding significant administrative costs and
reducing privacy protections. The IRS would also be required to
report personal income data to state exchanges, insurance
companies, and employers because premium credits and out-of-pocket
limits would depend on income.
The Effect of the Baucus Proposal
The net result is unambiguous: The Baucus proposal would impose
punitively high, regressive taxes on low-income and moderate-income
working families--those with the least ability to pay. It would
also subject them to lower incomes, job losses, and reduced job
opportunities. While the families with the lowest incomes will be
hit hardest, moderate-income families would also suffer from higher
taxes and lower incomes. Yet even at this high price, millions of
Americans would still be left without health insurance, and the
plan's tax penalties would further punish these uninsured for their
misfortune.
Meanwhile, all Americans, even those who can afford the higher
premiums and higher taxes, would suffer needless invasions of their
privacy as they are forced to reveal the income of other family
members to their employers and provide private, personal financial
information to their health insurance companies.
America does not need health care "reform" that increases
premiums and taxes and punishes the less fortunate. Americans need
reform that increases choices and options, eliminates regulations
that needlessly increase costs, protects privacy, and empowers
individuals and families to make their own decisions and control
their own health care.
Robert A. Book, Ph.D., is Senior Research
Fellow in Health Economics, Guinevere
Nell is a Research Programmer, and Paul L.
Winfree is a Senior Policy Analyst in the Center for Data
Analysis at The Heritage Foundation.