We’re Paying for Health Reform with Another 'Alternative Minimum Tax'?

It took me awhile to catch onto this (I guess real life got in the way of reading the legislation or even the revenue estimate carefully), but the House health care reform bill (.pdf) not only fails to provide a revenue source that will keep up with rising health costs (and thus is less likely to stay deficit-neutral beyond the first ten years), but it relies on a revenue source that’s likely to fall short of even that tax’s own standards. Why? Because it’s a surtax on the highest-income households (of 5.4% on income over $500K for singles and $1 million for couples)…and is NOT indexed for inflation. Sound familiar?

It should, because this is how the current-law “alternative minimum tax” (AMT) is supposed to work as well: a tax on rich people that over time digs deeper down into the income distribution as inflation reduces the real value of the unindexed exemption level. Now, in the case of the AMT there’s been this interaction with the ordinary income tax that also pushes more people onto the AMT whenever there’s a big cut in the ordinary income tax (for rich people) that doesn’t coincide with a matching adjustment to the AMT’s specification.

In CBO’s analysis of the House bill (.pdf), they suggest that if all the policies in the bill are carried out as written, the bill is likely to stay deficit neutral even beyond the first ten years–because the tough choices on Medicare and Medicaid spending will produce savings that will grow more rapidly (10-15 percent per year) than the costs of expanded coverage will (8 percent per year), so that even though the growth in surtax revenue (at 5 percent per year) will fall short of the growth in the costs of expanded coverage, on net the cost-saving and revenue-raising provisions combined will keep pace with the cost-increasing provisions. (Here’s a link to the revenue estimate by the Joint Committee on Taxation that feeds into the CBO analysis.) As CBO summarizes, with those assumptions (emphasis added):

CBO expects that the legislation [as written] would slightly reduce federal budget deficits in that [second] decade relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates, and the effects of the bill could fall outside of that range.

I add “as written” after “the legislation,” because legislation often fails to be carried out as written. Exhibit A: the “sustainable growth rate” in Medicare physician payments that year after year is overridden by the so-called “doc fix”–preventing scheduled (in law) cost savings in Medicare from materializing. Exhibit B: revenue from the AMT, which under current law would keep rising year after year as long as there is inflation, but which Congress overrides year after year by passing “AMT relief.” Both exhibits have deficit financing in common, which means that year after year Congress (with the prior and now current Administration’s support) makes sure that what was supposed to reduce the deficit actually increases it.

CBO’s judgment that the House bill will remain deficit neutral beyond the first ten years (and even within the first ten years) relies on a reversal of practice on both the old “Exhibit A”–because the “doc fix” is not included in the bill and so is effectively assumed not to happen–and the new “Exhibit B”–because this new, unindexed surtax on the rich is suspiciously like the existing AMT.

So forgive me if I don’t believe the House health reform bill will actually save us money, no matter what it says it will do “in law.” Congress and the Administration(s) are in the bad habit of not practicing what they preach–uh, pass.

Comments

[bob adamson:]

While the public option can be characterized as socialist (in the same way and for the same reasons as Medicare for seniors, the public library and the public schools can), it does have interesting benefits for the private sector. It can relieve employers from the burden of insuring their employees (or bargaining about this in labour or employment contracts) thereby allowing them to concentrate their capital and management attention more fully on their core businesses. For example, Canadian corporations currently have a major advantage in competition with their US competitor counterparts best illustrated, perhaps, by the fact that tax funded public heath insurance reduces the cost in Ontario by about $1, 400 per car in comparison to in Michigan.

Even if the forgoing is true, you may ask, are these advantages not more than offset by an increased tax burden to pay for ‘free’ medical services for all? Again drawing on the Canadian experience, it is true that the cost of maintaining the system in each Province is a major expenditure for both Federal and Provincial Governments. These Governments, however, have been reasonably successful in containing these costs. Thus, even before one factors in the cost savings to individuals because they do not pay insurance premiums (no premiums are paid in most Provinces but small premiums are paid in BC, Alberta and Ontario but these are minimal in comparison to US rates), the general tax burden for most Canadians is similar to or less than that for corresponding US residents.

In short, in assessing the out of pocket cost burden of a public option, consider changes not only to taxes but also to premiums and to administrative costs. Consider also the efficacy of the shifts in the tax burden and premium costs within the society. These factors rest primarily on the details of the plan rather than on the concept of a public option per se.

Drawing further on the Canadian experience, tax funded public health insurance promotes labour mobility (a benefit to both employers and employees) because employees do not fear losing coverage if they leave to seek other employment. More health care professionals remain private practitioners rather than employees of government agencies or private health care providers because the Canadian system, paradoxically, presents a much lower bureaucratic burden on the private practitioner. This advantage is enhanced by the fact that malpractice insurance rates for MDs are much lower (in part because claims for damages are lowered by the fact that medical services required because of malpractice are already covered by the system).

In short, there is a special burden for US employers in comparison to their counterparts in many other countries with publicly funded health insurance that is citizen and not employment based. This is not to suggest that there are not other issues of importance in the US that might not make the adoption of a program having several of the attributes described above unattractive for many US citizens. The foregoing simply sets out a perspective that is relevant to business and is rarely presented.

Nov 04 12:10 AM

[Darrell:]

What your analysis fails to take into consideration is many Americans cannot afford health care; therefore they do not seek treatment for their health problems.

My questions are: How many Americans die each year because they lack adequate health care? How many Americans suffer permanent health problems because they cannot afford the cost of medical care?

Public option is the solution to the problems of lack of financing by people with health care needs.

My suggestion is to put funding of public option health care above funding for foreign aid, funding for overseas military bases, above funding for unjust wars, and I sure your readers can list many other government programs whose funding should be below public health care

Nov 04 12:13 PM

[Chancer:]

As I understand it, the CBO accepted 10 years of revenues measured against only 6 years of expenses, as the healthcare program does not become effective for 4 years.

By all accounting standards that would be considered fraudulent.

It also guarantees that the second 10 year decade will be revenue negative contributing to the deficit.

Of course, this assumes that you believe the Federal government's ability to be even close on financial estimates, budgets, revenue and cost projections. When have they ever? The track record predicts otherwise.

Nov 04 03:45 PM

[bob adamson:]

Some readers might be interested in the attached Canadian poll results published October 6th.

nanosresearch.com/...

Nov 06 04:20 PM