Tax Analysts Blog

The Three Tax Dimensions of Healthcare Reform

Posted on Jun 9, 2009

Even though proposed healthcare reforms fall far short of achieving universal coverage, and even though nebulous cost savings are being used to offset projected costs, Congress will still need new sources of revenue to finance its ambitious healthcare reforms--in the neighborhood of $300 billion over 10 years.

Yesterday long-awaited official estimates of various revenue raisers leaked out. Below is my summary of the results.

These "very-preliminary" estimates should not be taken as gospel -- particularly since any proposal estimated here can be tweaked up or down to conform to Congress's revenue needs. But they do provide excellent perspective on what is possible.

Everybody is still holding their cards close to the vest. But we know that Senate Finance Committee chairman Max Baucus is leaning toward taxing a portion of employer-provided health benefits. And we know House Ways and Means Committee chairman Charlie Rangel is dead set against such a move. This sets the stage for a classic House-Senate, liberal-conservative battle royale to take place this autumn when -- and if -- the bill makes it to conference committee. As you can plainly see, healthcare reform legislation is major tax legislation.

But this is not the end of the tax story. Beyond paying for healthcare reform the second huge tax-related health reform issue is how to help lower income workers afford their new health insurance premiums and how to make insurance coverage more affordable to small business. (A good summary of the possibilities can be found on page 20 of the Baucus "white paper" on health care reform.) The just-released Kennedy draft of healthcare reform discusses subsidies based on income levels. One likely delivery mechanism for this subsidy is a refundable tax credit for low-income individuals. My guess -- just as a matter of maintaining jurisdiction -- the tax-writing committees will propose tax credits and the other congressional committees working on healthcare will propose direct subsidies. I will also venture a guess that the tax-writing committees will prevail because administratively it is easier to enforce income related benefits through the tax system and because political subsidies that look like tax cuts are more politically palatable than subsidies that are explicit expansions of government spending.

If that is not enough tax stuff in health reform for you, we have still more. The third big tax issue is how to enforce individual mandates to purchase -- and employer mandates to provide -- health insurance. So far this touchy issue has been almost entirely swept under the rug. In general, under Democratic proposals employers and individuals must participate in healthcare reform or suffer a financial penalty. This is what is called "play-or-pay." There will be exceptions for low-income workers and small businesses. But how will the government enforce the mandate on the rest of America? The logical choice is to use the IRS. Yes, in other words, those who don't comply with the mandate will pay a new tax (although it is certain it will not be called such). In Massachusetts -- whose already-enacted healthcare reform is the model Congress is following -- the state's tax collection agencies are doing the job. This "detail" will surely be another rallying cry for Republicans going into the 2010 elections.

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