Like all of the Democrats trying to push through health care reform with no way of paying for it, Senate Finance Chairman Max Baucus (D-MT) has been on a quest to find new revenue for his plan.
He was considering imposing a tax on employer health insurance contributions above a certain level, say $20,000 for a family. That means that a worker with dependant coverage whose employer spends $25,000 a year on the policy would have to pay normal income taxes on an additional $5,000. The first $20,000 would still be tax free.
Besides raising revenue to pay for the legislation, there was an expectation that employees would opt for higher deductibles in order to stay under the limit and avoid the additional tax, which would eventually help bend the health care cost curve by lowering utilization.
Of course, there are two primary reasons why policies get that expensive: one is that many consumers want comprehensive coverage with low out-of-pocket spending limits. (Indeed, President Obama is demanding that kind of coverage in the reform.) And the other reason is that businesses, especially small businesses with a disproportionate number of older or sicker employees, will see significant rises in their premiums.
Neither of these reasons is the result of “fat cats” receiving “gold-plated coverage.”
But such a tax would be imposed on individuals, and especially union workers—if they weren’t expressly excluded. And that seemed like a bad political move.
So the chairman decided to shift the tax to health insurers that offer the plans, thus taxing publicly despised insurers rather than the struggling middle class and the untouchable (from the Democratic standpoint) unions.
The problem is that insurers—like all businesses—would absorb the taxes initially, but would eventually pass them on to consumers. That’s because businesses don’t pay taxes, people do.
We could be generous and suppose that Baucus actually knows this, and that he is just trying to pull a fast one on the public. But there’s a fair chance he really thinks he’s taxing insurers.
Which leaves us to wonder: Does anyone in Washington understand how taxes work?
Today’s TaxByte was written by IPI resident scholar, Merrill Matthews.