Tax Analysts Blog

Unions Get a Questionable $60 Billion Concession

Posted on Jan 15, 2010

This morning's papers are buzzing with news that Big Labor is getting five extra years of transition relief from the new tax on Cadillac health plans. That's the unions' payback for their energetic support of Democrats in elections.

It's a maneuver no different than business makes when faced with a tax increase: when a tax hike is inevitable, try to get a big concession in exchange for your support of the legislation. For example, in 1993 President Clinton proposed raising the corporate tax rate by two percentage points. Big business asked that it be reduced to one, and kept the rest of their complaining about the bill to a minimal level.

Also, it is common in tax bills to grant transition relief for business deals that were negotiated prior to the effective dates. So there is precedent and it makes a lot of sense to let union members with previously negotiated contracts rely on current law for the remainder of their contracts. (Frankly, I don't understand why this was not automatically included in the health care bill.)

But what stinks about this deal is that transition relief is available to union members only for five years irrespective of the life of their existing contracts. For the general public the tax will begin in 2013. For union members it will begin in 2018. That's eight years from now! Unions should be granted relief only for the life of their remaining contracts (which I will guess on average is about two years).

This backroom deal is out in left field. After a legitimate transition-for-existing-contracts period, there is no justification (and, as far as I know, no precedent) for using union membership as the criteria for favorable tax treatment. The Republicans are right to jump all over the Democrats on this one. Why -- besides politics -- should union members get a tax break not available to everybody else? A much more defensible approach would have been to use income limits. Give the transition relief to citizens making less than, say, $100,000. That would provide justifiable transition relief to all the middle class instead of just union members.

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