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Mccain's Fuzzy Math Health Care Plan

If there's one thing we all know about John McCain, it's that he's not the candidate who's going to raise taxes. But is that really so? A new paper out this morning, from the Center for American Progress, suggests otherwise. 

I haven't had a lot of time to look at it--or to vet it with other sources or get a response from the McCain campaign. (Hope to do so in the coming hours and days.) So what follows should be taken as a very tentative reading, until I learn more. (I'm blogging about it since the conclusions do make sense upon initial reading.)

The paper, by James Kvaal, Peter Harbage, and Ben Furnas, looks at what McCain's health care plan will do the tax burdens of various Americans. As you may recall, the McCain has indicated he wishes to change the tax treatment of health insurance. This sounds like an archaic, technical tweak but, in fact, it could have profound importance. 

The government currently makes premiums for group health insurance--that is, health insurance you get from your employer--exempt from personal income and payroll taxes. McCain has suggested he would get rid of that exemption. (I say "suggested" for a reason, but more on that in a second.) In its place, he'd offer a tax credit worth $2,500 to individuals and $5,000 to families, good for the purchase of any insurance policy. It'd be a refundable credit, so that people too poor to pay taxes could simply take the credit as cash (assuming they spent it on health care).

The existing tax break, like most deductions that apply to income taxes, is regressive. If your tax rate is higher, then the deduction is worth more. And, at least initially, McCain's policy would look more progressive, since it'd be worth the same amount to all taxpayers, regardless of income. In principle, that's a good thing.

But note the key word there: "initially." McCain's advisers say that the credit would grow at the rate of inflation--that is, it'd get more expensive at approximately the rate of other goods (or, at least, how the government measures the price increases of other goods). Health care expenses, of course, keep going up faster than other expenses, mostly because of medical technology and the (largely unrestrained) demand for it. So if people kept paying for the same level of insurance, the tax credit would quickly fall behind: They'd end up paying more in taxes. According to the report, "In 2009, the credit will cover 36 percent of an average employer-provided family policy (based upon CBO projections). By 2018, however, the credit will cover only 24 percent of the cost of the same policy."

(This is all in addition to the fact that, for many families, the credit will not be enough to buy a policy--even now--because health care for families costs a lot more than $5,000 a year.)

Now, to its proponents, this feature of the tax credit--the fact that it increases so slowly--is a feature, not a bug.  It's designed to encourage people to be more thrifty in their purchase of insurance. Ideally, they'll go for less generous policies--ones that don't subsidize so much wasteful care.

But this is where we run smack into the real problem of the McCain plan. (Well, one of them.) This is an incredibly crude and ineffective way of controlling costs. It puts the entire onus on the consumer--basically, it says to everybody "spend less on health care" without doing anything to make sure that people can actually get decent health care at that price. There's no guarantee of minimum benefits, in terms of services covered or limits on out-of-pocket expenses; nor is there any guarantee of available coverage for people with pre-existing conditions. (Folks with pre-existing conditions could still get coverage through employer policies. But, of course, as the tax deduction goes away, employers will have less incentive to give such coverage in the first place.)

The better way to control costs is with a variety of approaches that starts with a guarantee of coverage to everybody. But, of course, to do that, you need to create some sort of new insurance arrangements--a government-regulated pool of plans or a government-run plan like Medicare. That's what Democrats (and some Republicans) have proposed.  But McCain dismisses that as "big government."

So changing the tax treatment of health insurance, as McCain has suggested he would do, is a worthwhile endeavor--*if* you do it as part of a broader package of reforms. But outside of those reforms, it's a rather clumsy and potentially dangerous way to reduce people's health insurance coverage (or to raise their taxes).  Either way, it's not such a hot idea.

OK, and now to that caveat I promised at the beginning. Unlike Obama, McCain hasn't been clear about exactly how he proposes to change the tax treatment of health insurance. And there are rumors around that they might not get rid of the existing deduction entirely, preserving it at least for payroll taxes. It's not clear how that'd affect the paper's conclusions, since the paper assumes the entire deduction goes away. But, of course, if McCain keeps some of the existing tax break, then either his plan won't have as dramatic effect period--or it will run up a higher deficit. 

--Jonathan Cohn