Finish Reform Right — Don’t Tax Health Benefits

By AFSCME President Gerald McEntee FDL

Working families are struggling with the high cost of health care, yet the health care bill passed by the U.S. Senate on Christmas Eve would tax their health care benefits. That’s a terrible mistake. Unfortunately, even some progressive leaders, like my friend Sen. John Kerry, have been taken in by myths that favor the tax. In a Huffington Post article published earlier this week, Senator Kerry asserts that an excise tax on high cost health plans will help control health care costs without taxing workers. The facts simply don’t support his conclusion.

According to the Joint Committee on Taxation (JCT), the vast majority of revenue collected from the tax will come from individual income taxes and joint filers and not by insurance companies. Employers will respond to the tax by reducing the benefits they offer employees, so they can fit their premium charges under the tax threshold. To the extent insurance companies pay the tax, the tax will be directly passed through to employers and employees in the form of higher premium charges.

If Congress decides to tax health care benefits for the first time in American history, it will be middle class workers across America who will pay the price. The first thing employers will do is slash the health care benefits they provide to avoid the cost of the new tax. For years, workers have given up wage increases in order to protect their health benefits. Now, those workers and their families will lose the health benefits on which they rely.

The Congressional Budget Office (CBO) and many supporters of the excise tax on health care benefits claim employers will pass along cost savings to their employees in the form of raises. They may also believe in the tooth fairy. According to a recent Towers-Perrin study of 433 executives from midsize and large companies, nothing could be further from the truth. In fact, when asked what they would do, “If health care reform reduces benefit costs to the organization," only 9 percent of the executives responded by saying they would increase salaries. The Economic Policy Institute backs up that study with convincing research demonstrating that “health care cost increases do not correspond to major movements in wages or compensation.”

Many of the proponents of the excise tax, including Office of Management and Budget (OMB) Director Peter Orszag, see virtue in the fact that it will force companies to trim their benefits and require workers to pick-up more of their health care tab. That’s a double whammy for workers. More importantly, it is certainly not the “change” our members expected when they knocked on doors and cast their ballots for President Obama and Vice President Biden. We believed their promise that health care reform would include a guarantee that workers who liked their health care benefits would keep them. A tax that falls disproportionately on older workers, workers at smaller firms and others with decent but not extravagant health care does not keep that promise. And it does not make sense.

The excise tax is not essential, or even relevant, to health care reform. The excise tax is a tax policy, not a health care policy. The CBO’s scoring of the Senate bill underscores this point. CBO calculates that the Senate bill will decrease the federal budget deficit by $130 billion over the 2010-2019 period while the excise tax will raise $149 billion. These numbers clearly demonstrate that the excise tax is not a necessary component of health care reform, even as a financing mechanism. It is simply a method to raise revenues to reduce the deficit.

There are far better alternatives for funding health care reform, just as there are better ways to reduce the deficit. The House bill would do it by asking the wealthy to do their part through a small surcharge on families earning more than $1 million annually. It asks the wealthiest Americans, and the insurance companies responsible for skyrocketing costs, to pay their fair share. And importantly, it doesn’t unfairly place the burden of reform on America’s middle class.

Make no mistake: A tax on health benefits will increase the taxes on the middle class. It will add to the burdens faced by middle class families already struggling with the high cost of health care coverage. It is a big mistake that needs to be corrected before Congress finalizes the bill. We are at a pivotal moment in the debate. The time for action is upon us. President Obama and members of the House must tell the Senate that their misguided and unnecessary tax on health benefits cannot survive in the final version of health care reform.