The voices of Tax Policy Center's researchers and staff
As promised, TPC has crunched some numbers for the health reform plan introduced by congressional Republicans last week. They are pretty ugly, and an indication of just how hard it is to confront the taxation of medical care.
The Patient’s Choice Act, sponsored by Representative Paul Ryan (R-WI), Senator Tom Coburn (R-OK) and others, takes some remarkable steps toward bipartisanship by embracing regional purchasing pools. It also includes some very Republican ideas, such as giving low-income families $5,000 to buy their way out of Medicaid.
But most interestingly, it proposes a generous tax credit of $2,300 for singles and $5,700 for families to help buy private insurance. And it would pay for this new subsidy by repealing the tax exclusion for employer-sponsored insurance. The authors have left out some key details, such as whether the credit would be refundable, how it would be indexed for inflation, and whether employer-paid premiums would be subject to Social Security and Medicare payroll taxes.
So, TPC’s health modeler Surachai Khitatrakun ran several options. And he found the GOP is faced with a painful choice: It can design a credit-for-exclusion swap that won’t bust the budget. But to do so, the plan would end up raising taxes on people making less than $50,000. That’s both a bad idea and a political non-starter.
If the exclusion is made non-refundable, and if workers have to pay payroll taxes on their health insurance, the trade-off would actually boost revenues by about $200 billion over 10 years. Income taxes would fall by $1.1 trillion, but payroll taxes would rise by even more--$1.3 trillion. Unfortunately, most of that extra tax burden would end up on the backs of those making $50,000 or less. Those making between $20,000 and $30,000 annually would see their taxes rise by about $260 and their after-tax income fall by more than 1 percent
Every other option TPC looked at risks becoming a major revenue sink. For instance, if the credit is made refundable, as it probably should be, and employer insurance is subject to payroll tax, total federal revenues would fall by nearly $600 billion over the decade. If the credit is refundable and the value of insurance remains exempt from payroll taxes, the swap would cost a staggering $1.7 trillion over a decade. Not much chance Congress will buy a plan that costly when it already faces such huge deficits.
If the credit is refundable, the swap becomes pretty progressive. Those making an average of $15,000 would get a tax cut of roughly $700 and see their incomes rise by about 5 percent. Taxpayers with an average income of $70,000 would see their after-tax incomes rise as well, but only by about 2.3 percent. The top 10 percent of earners would end up paying roughly the same tax as they do now.
By the way, for all of these models, TPC assumed the credit would be indexed to an average of the growth in the consumer price index and medical costs. If it is tied just to CPI, the credit would quickly become far less generous, though, of course, Treasury would also lose less revenue.
So, it seems policymakers are left with three choices: They can make the exclusion-for-credit swap progressive and expensive, they can make it regressive and cheap, or they can propose a much more modest credit. No one ever said this was going to be easy.
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