Harold Pollack is a professor at the
University of Chicago School of Social Service Administration and
Special Correspondent for The Treatment.
Taxation of health benefits may be the most divisive issue among progressives and moderates who favor health reform. A large and influential group of policy experts--not least among them,Congressional Budget Office Director Doug Elmendorf--believe that this is the surest way to pay for reform and curb health spending in the future.
They are getting heavy pushback from powerful constituencies, and, if you believe the polls, most Americans voters--none of whom seem very happy about the prospect of paying taxes on their health insurance benefits. They figure “health reform” should mean paying less for their health care, not more. And they make a good point.
There is no bad guy in this fight. Democrats must raise more than $1 trillion over ten years to pay for health reform. There are strong economic and policy reasons to include limits on tax-deductibility (along with other things) in the financing package. Jonathan Gruber and other economists rightly note that millions of affluent people receive poorly-targeted and inefficient subsidies of their generous health coverage. If we were building our health financing system from scratch, we would not recreate the current tax-subsidized employer-based system.
Of course we are not starting from scratch. Many unions’ hallmark accomplishment was to win generous employer-provided health benefits for their members. Not surprisingly, taxation of these benefits is anathema to many unions, particularly for major industrial and public employee unions that fought hard to win these benefits and have accepted lower cash wages to keep them.
As a matter of coalition politics, President Obama is wise to remember who his friends really are. He might be Senator Obama right now, were it not for the massive support he received from organized labor in the 2008 campaign. When I was a nighttime guinea pig testing out the campaign’s computer phone system, union trainers put me through the paces in a local union facility. Unions provided boots on the ground by the thousands in various canvassing efforts. When it came time to tell nervous white voters in Michigan, Pennsylvania, Indiana, and Ohio that it’s safe to vote for a black guy with a weird name, union organizers were often the most credible people to make that pitch.
As a matter of substance, employer-based coverage solves real problems of efficiency and risk-pooling for millions of people. Millions of Americans with serious disabilities and chronic conditions receive private health coverage through their own employer’s plan or through that of a spouse or a parent. It would be unwise to unravel this system, thereby exposing Americans to the inefficiencies and the underwriting practices of the non-group market.
Finally, there is the awkward fact that Democrats savaged Senator McCain’s proposal to tax employer-provided health coverage during the campaign. Wouldn’t it be a flip-flop of epic proportions for Democrats to turn around and tax such benefits now?
Well, no. The tax proposals Democrats are debating would be good politics and good policy. Most Americans, certainly most union members, would benefit from policies that impose modest taxes on generous employer-provided plans for affluent Americans. There are ways to do this that honor unions’ core concerns. One proposed option would cap the deduction at $6,780 for individuals and $17,280 for families beginning in 2013--but would only apply the cap on individuals with incomes exceeding $100,000 or families with incomes exceeding $200,000.
Such measures would hit a minority of union members--for example teachers married to high-earners in New Jersey. By and large, though, these are progressive tax increases on affluent professionals, and would impose very little additional tax on most rank-and-file union members. Even this highly constrained cap on the affluent would raise some serious cash, an estimated $162 billion over the next decade.
The flip-flop charge is especially bogus. Eliminating the tax deduction for employer coverage was the centerpiece of Senator McCain’s health plan. That plan included only limited and vague provisions to address the serious likely consequences of this drastic change. It included little else to help low-income people or to ensure universal coverage. On the merits, the McCain plan was bad policy.
Democratic health reforms--as envisioned by Candidate Obama, the House’s Dingell bill, or the Senate HELP bill--include major provisions to cover the uninsured, protect people with preexisting conditions, subsidize low-income workers, expand Medicaid, promote public health, and more. I would like a more radical health reform than we are likely to see. Yet the bills on the table remain hugely ambitious and progressive.
Democrats must now combine the various bills and enact them into law. We are getting close. We just need that $1 trillion. None of the available options are very appealing. Constrained provider payments are necessary but also painful. Confused Washington Post editorials notwithstanding, a surtax on rich people is amply justified, but poses political challenges. And yes, some adjustment should be made in the generous tax subsidies provided for health benefits provided to people like me.
We’ll need unity to close this out. That $162 billion could be a deal-maker--particularly if it announced as a painful but needed compromise among allies determined to see this thing passed. At this critical moment, each member of the reform coalition must sacrifice something, to raise the required cash, and to keep the momentum going and to demonstrate that we remain together down the home stretch.
We’ll need direction, too. It was good strategy for President Obama to allow five months of Congressional sausage making. Now it is time to impose greater discipline to achieve a feasible and coherent bill. Everyone must give a little. It won’t be easy, for unions and for many others. The President that led this coalition to victory in November must spell out the rewards that come with loyal friendship. This is a tough issue. Closing the deal won’t be easy for him, either. His own legacy is on the line.
If we can’t compromise among ourselves, we grant real leverage to Republicans and to conservative Democrats. Let’s avoid that.
--Harold Pollack