Though hopes for bipartisan cooperation on health-care reform were dashed months ago, there is at least one part of the program that unites labor, Republicans, and Democrats: They all hate the health-insurance excise tax.
"Does the Senate really expect the House to tax the middle class?" asks Rep. Joe Courtney of Connecticut, an opponent of the provision. Courtney recently sent a letter opposing the tax, the key funding mechanism in the Senate Finance Committee's version of the health-reform bill, to Speaker Nancy Pelosi. He was joined by 180 of his colleagues -- most of the Democratic caucus, including many senior members. "It is potentially more problematic than the public option."
Today, health-insurance costs are excluded from taxation. If the excise tax passes, insurers will face a 40 percent tax on costs in excess of an $8,000 threshold for an individual insurance plan and $21,000 for a family plan. (The current family plan costs an average of $13,375.) These thresholds are indexed to inflation. The tax would produce $215 billion over 10 years; it is the largest single source of revenue in the legislation.
"This is a fee that is being imposed upon insurance companies," Linda Douglass, the spokesperson for the White House's Office of Health Reform. "The goal here is to encourage a more efficient use of health-care dollars."
The White House's position on the tax is ambiguous: It sees it as one of many good ideas and is most interested in getting a bill passed. The tax is politically touchy for President Barack Obama, who is being accused of breaking his promise not to raise taxes on the middle class and campaigned against presidential rival John McCain's proposal to let all health benefits be taxed directly.
Critics worry that insurance companies would simply pass the cost of the tax on to employers that would in turn pass the same cost on to employees. While proponents of the measure say it will only affect so-called Cadillac plans, an analysis by the Joint Committee on Taxation reports that 19 percent of single plans and 14 percent family plans would be affected by 2013, with the number steadily increasing until a third of both family and individual plans come under the tax in 2019. But the actual impact per family, however, is negligible, with the individual tax rates inching up about a tenth of a percent. Only 7.7 percent of taxpayers would actually be affected by the legislation in 2013, rising to 17.6 percent in 2019.
There is worry that seniors and people in high-risk occupations, as well as union members who forgo higher salaries for better benefits, will catch most of the tax. In the current bill, the elderly and people in high-risk occupations have higher thresholds, as do 17 states with particularly high health-care costs, and senators like New York's Chuck Schumer plan to expand those protections as the legislation moves forward.
But those whose plans fall under the tax won't even pay all of the cost. The Center for Budget and Policy Priorities, which supports the provision, found that most insurers would lower plan prices to avoid the excise tax altogether. The savings will be passed on to workers in the form of higher wages or other benefits. In fact, the Joint Committee on Taxation estimates that a majority of revenue from the provision wouldn't come from the excise tax itself but rather from income taxes paid on workers' new higher salaries.
Moderate Democrats on the Senate Finance Committee also hope the excise tax will lower health-care costs: Health wonks in the administration and academia think that taxing health-care plans will provide an important incentive for insurance companies to lower costs.
Opponents disagree. "The only reason that this is in existence is because of conservative politics on the Senate Finance Committee," Jerry Shea, the AFL-CIO's top health-care staffer, told the Prospect. "Instead of focusing on real health costs, they focus on health plans and kind of miss the real target. That's the egghead economist approach. They just don't know what they're talking about."
The White House emphasizes that the excise tax is only one way of reaching the administration's goal of a deficit-neutral bill that lowers health-care costs. Office of Management and Budget Director Peter Orszag recently listed the excise tax among several other provisions the administration believes could slow the growth of health-care costs. But those opposed to the tax counter that a public option would be the more effective means of addressing health-care costs. The public option is nationally popular, cheap, and popular with economists. It's also vehemently opposed by conservatives and some moderate Democrats.
Cost-cutting aside, more revenue would have to be found if the excise tax were eliminated. The House's proposal -- a surtax on millionaires to fund reform -- isn't welcome in the more conservative Senate. The Obama administration has suggested a clever way to fund the bill: Limit the charitable deduction for the wealthiest Americans to 28 percent, not 35 percent, so that everyone's donations are valued the same way. This would raise about $300 billion over 10 years, more than enough to replace the cost of the excise tax. But since the idea was proposed last March, it has lacked congressional champions.
"This is where the White House has got to step in and remind people," Courtney says. "[Democrats] campaigned on protecting the middle class, and the JCT shows in black and white where the burden for who pays for the health-care bill is going to fall: on the middle class."
While Courtney is an ally of the labor movement, he makes clear that his objections to the tax are broader than its effect on union workers. But labor is not a political constituency that Courtney, or any other Democrat, wants to anger.
The Center on Budget and Policy Priorities floated one possible compromise: When the Bush tax cuts expire next year, freeze the tax on charitable deductions at current levels, so that someone making enough money to pay 35 percent of their income in taxes would only deduct 33 percent of a charitable donation. This would raise between $70 billion and $90 billion, enough to increase the threshold of the excise tax to $25,000 or more, providing more protection for vulnerable groups. CBPP also suggests increasing the transition period for states with expensive insurance plans and, perhaps most important politically, exempting union-bargained health-insurance plans until the first contract renegotiation after the tax goes into effect.
For now, though, this compromise has no major backers. However, combined with a public option -- an idea whose popularity is only increasing -- this middle route might be enough to satisfy the excise tax's critics. On the other hand, removing the excise tax would represent one less cost-saving mechanism, which could hurt the prospects of health-care reform – and not just because of increased costs. Cutting out such a major revenue source might lead to cuts in health insurance subsidies for low-income Americans. Combined with the individual mandate -- the requirement that everyone possess health insurance -- a lack of subsidies could require some citizens to buy health care they can't afford.
A brawl over funding -- especially one involving labor, the right's favorite bogeyman -- is the last thing the administration wants right now. Senior White House officials are involved with daily negotiations as Senate leadership combines the Finance Committee's bill with the more expensive, and more progressive, version from the Senate's Health Education Labor and Pensions Committee. While White House officials won't discuss specifics of the negotiations, you can bet that Obama's representatives are cognizant of the political difficulties at hand. If Obama supports anything that could be characterized as a tax increase on the middle class, it will have broader political consequences for his administration.
The reformers who want to remove the excise tax aren't losing faith.
"People have declared lots of issues dead, like the limit on itemized deductions," the AFL-CIO's Shea says. "They declared the public plan dead a couple of months ago, and you see it coming back."
Correction: The original version of this article misspelled Jerry Shea's name.
