The voices of Tax Policy Center's researchers and staff
On Friday, Elizabeth Warren released her financing plan for Medicare for All. It is predictably wonky and politically courageous—new spending is way more popular if it seems to be free. Her “Employer Medicare Contribution,” however, is a regressive tax that could have many undesirable effects.
The logic behind the levy is that free public insurance would be a windfall to employers who currently offer health insurance. That’s because, when relieved of their health coverage costs, their compensation costs would plummet. Economists say that wages eventually would rise, but it could take a while to get to that new equilibrium, especially in markets with few employers.
The fee is intended to avoid that windfall and raise $8.8 trillion over ten years to help pay for Medicare for All. Warren’s plan would assess a per-employee fee equal to 98 percent of what a large employer currently spends on health insurance, and annually increase the payment to reflect increases in overall health costs.
Large employers that don’t offer health insurance today would pay a fee equal to the average per employee premium. Firms with fewer than 50 employees that don’t provide insurance to their workers would be exempt from the new levy.
Warren argues that employers would be a little better off under her plan because they’d only have to pay 98 percent of current premiums, but that is not true. Under current law, employees willingly accept lower wages in exchange for health insurance. Thus, employers who provide insurance can pay lower wages and attract a similar quality workforce than those that don't.
Under Warren’s plan, workers still have to accept reduced wages, but their employers won't give them anything of value in exchange because health care would be publicly provided. This would create a huge subsidy—and a big hiring advantage—to small firms that provide their workers with no health insurance today (or new small firms).
Penalizing generous small employers and all large employers compared with small firms that don’t offer health coverage doesn’t make much sense. The new levy would be hardest on employers that offered the most generous coverage or operated where health care costs are especially high. They’d be saddled with the highest tax, but no longer providing anything of value to their employees in return.
Another difference between Warren’s flat, per-worker tax and employer-sponsored health insurance is that workers probably don’t pay a flat amount of forgone wages for health insurance now. While evidence is scant on how employer premium payments are distributed within a firm, it is likely that young healthy workers, who also tend to have lower wages, pay less for health insurance in the form of reduced wages than older and higher-income workers. Higher-income workers have an incentive to cross-subsidize their lower-wage colleagues both because they value coverage more and because they save more in taxes by converting wages into health insurance (the higher your tax bracket, the more you save from tax-free fringe benefits). Replacing these generally progressive premium contributions with a new flat tax would lead to wage reductions for low-wage workers and wage increases for those with high wages, which is surely not what Senator Warren intends.
Small exempt employers would benefit from lower labor costs. But as soon as they hit the 50-employee threshold they’d face an enormous penalty for adding jobs since hiring one additional worker would make them subject to the fee. At, say, $10,000 per employee, that 50th worker would subject the firm to a $500,000 tax. (The plan could be modified to reduce this penalty on expansion, but at a revenue cost.)
Supporters of Warren’s plan rightly point out that the ACA also imposed a penalty on firms with 50 or more employees that don’t offer qualifying health insurance. Few large firms are affected by this penalty because most would offer health insurance even without the mandate. Almost 97 percent of firms with 50 or more employees offered health insurance in 2018. But the mandate can create a barrier to expansion for small firms. The right thing to do with a regressive, poorly designed tax is to eliminate it, as my Urban Institute colleagues recommended back in 2014. Replacing it with an even more regressive and less well designed tax is the wrong solution.
Warren could improve her plan in several ways: She could assess the same per-employee charge on all employers regardless of whether they currently offer health insurance or the generosity of their plan. She could base the per-firm tax on premiums for a standard plan in the ACA marketplaces (for example, second highest priced silver plan) rather than actual premiums paid by employers. Of course, that would make it very clear that this fee would be a tax on hiring, which doesn’t make much sense as policy.
A better choice would be to add the charge to Medicare payroll taxes, which would be much more progressive. The best choice would be to finance government insurance via a broad-based tax, which could be made even more progressive.
Warren has created these distortions because she doesn’t want to characterize the “employer contribution” as a tax. But the Congressional Budget Office and the Joint Committee on Taxation surely will treat it that way since it is compulsory—no different from current-law Medicare payroll taxes. Given that a tax is inevitable, she’d be better off proposing a more progressive and less distorting option and explain that low- and middle-class voters would gain far more from Medicare for All than they’d bear in additional taxes.
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