DC’s Excise Tax Cult Battles Unions, Critical Research and Taxing the Rich

The centrist natives of Washington are banding together to defend their faith-based totem: the wildly unpopular excise tax on high-cost health plans.

They and some of their academic allies are reciting mantras in editorial pages and opinion columns about how it will cut wasteful spending and raise billions in revenues, as they’re preparing to fend off outside forces – including unions and progressive House Democrats worried about a 2010 electoral tsunami – that are rising up against the cost-shifting tax. It’s expected to burden 31 million middle-class families (mostly nonunion) with added costs, about a fifth of the workforce.

Indeed, the mounting opposition – and the overwhelming evidence undermining virtually every claim made for the tax – has prompted some Democrats to start looking at a long-overlooked source of added revenue from the health care system: adding as a Medicare tax the unearned income of the super-wealthy, rather than just using payroll taxes. As an early champion of the idea, Steve Wamhoff, legislative director of Citizens for Tax Justice, explained to me a while ago, “If Paris Hilton is living off investments, she doesn’t contribute one cent to the Medicare fund,” while workers have to pay part of their payroll tax. So it was potentially promising for progressives that The Wall Street Journal reported Tuesday:

House and Senate negotiators are considering applying for the first time the Medicare payroll tax to investment income as part of a compromise to pay for a health overhaul.

The extra Medicare tax would apply only to the wealthy and could allow congressional Democrats to reduce the sting of a tax on high-cost insurance plans, said Democratic aides and others briefed on the negotiations.

Labor leaders complained directly to President Barack Obama on Monday about the tax on high-value plans, which would hit some union members who have negotiated generous health benefits.

“The only natural constituency for this is DC economists,” RJ Eskow, a health policy analyst, prolific blogger and an adviser to the Campaign for America’s Future, told Truthout. “Large employers and unions are against it” – as is the public by a two-to-one margin. Equally devastating is the political fallout for the 2010 election, as NPR, Truthout and other media outlets have reported, because of potentially low turnout in 2010 by union members and progressives. On Tuesday’s “Morning Edition” show, Mora Liasson reported:

Steve Rosenthal is the former political director of the AFL-CIO. He worries about what happens politically when union members are disillusioned with Democrats. And they are disillusioned today, Rosenthal says, because of the Cadillac tax and the fact that a bill making it easier to organize workers, the Employee Free Choice Act, still hasn’t come up in the Senate.

Mr. STEVE ROSENTHAL (Political Director, AFL-CIO, Former): The union vote is really critical in – particularly in mid-term elections. And if you look at the numbers of the states that are battleground states in 2010 – places like Ohio and Pennsylvania and Illinois and Missouri and Michigan – certainly, these are all states where the union vote is significant, and by that, I mean anywhere from 25 percent of all the votes cast in these states, in some cases up to 37 percent. In 1994, we saw what happened when union members stayed home.

LIASSON: At the press club, Rich Trumka delivered an even sterner warning. He said no matter how hard union leaders may work this year for Democratic candidates, it may be hard to get there rank-and-file to follow them, the same problem Democrats faced in 1994.

Mr. TRUMKA: We swallowed our disappointment and we worked to preserve a Democratic majority in 1994 because we knew what the alternative was. But there was no way to persuade enough working Americans to go to the polls when they couldn’t tell the difference between the policies of the two parties. So politicians who think that working people have it too good are actually inviting a repeat of 1994.

That recipe for political suicide was apparently enough to prompt a White House leak after Monday’s meeting with unions that President Obama, an excise tax proponent, was open to raising the threshold on the Senate plan that would put a 40 percent excise tax on employers offering high-cost plans. But that meager compromise has been rejected so far by House progressives who are essential to passage of any health bill, and doesn’t even address the underlying “weirdness,” as critics view it, of a policy proposal as bereft of evidence – and counterproductive – as, say, abstinence-only sex education.

Like the fundamentalist right-wingers in the Bush administration who continued to fund these programs with billions even after evidence showed they didn’t change behavior and may actually increase pregnancies, today’s centrist Democrats have blind faith that their excise tax nostrums will magically lower costs and raise revenues. But even some of their staunchest proponents are starting to concede that it all “might fall flat.”

So to Eskow, helping to organize an anti-excise tax campaign for the Campaign for America’s Future, Obama’s apparent willingness to raise the threshold at which health plans get taxed or possibly exempt some existing union contracts, doesn’t change its underlying theoretical and factual weakness. “The theory is still bullshit,” he told Truthout. “It’s like saying, ‘I’m not going to place a hex on red-headed people,'” he said of a possible compromise. “Okay, that’s nice, but it’s still stupid to place a hex.”

Comparing the theoretical underpinnings of the excise tax to witchcraft, “voodoo economics” and faith-based sex education may seem like rhetorical overkill, but the critics and skeptics, citing overwhelming, generally nonpartisan research, have undercut every major argument on behalf of the excise tax.

So, why are its supporters still claiming, as a Washington Post editorial did Tuesday, “The attraction of the tax is that it raises money to pay for health reform – about $150 billion from 2013 to 2019 – while simultaneously making health reform less costly, by reducing the over-consumption of health care.”?

Apparently, the editorial writers didn’t get around to reading thoroughly a balanced look at the questions being raised about the excise tax by prominent health care analysts in one hard-to-find publication: their own newspaper. Less than a week earlier, The Washington Post reported new doubts about the claims made on behalf of the tax so fervently embraced by the all-knowing editorial writers (of course, the article was only on page three, so they might have missed it). For instance:

Health analysts recently questioned the assumption that the tax would target only the most lavish insurance packages, nicknamed “Cadillac plans.” The analysts, writing in the journal Health Affairs, found that some less-generous plans could be taxed because they are costly for other reasons. The location of an employer and the type of industry, for example, have as much to do with the cost of plans as the generosity of the benefits and the kind of plan. Smaller businesses, especially those with a preponderance of older workers, tend to have higher premiums, as do certain industries, including the health-care sector.

The article also quoted the country’s leading health economist, Princeton’s Uwe Reinhardt, as dismissing the entire cost-cutting rationale behind the tax – consumers wisely choosing to forego unnecessary, expensive care – as “nonsense.”

On the same day as yesterday’s editorial, the Post’s business columnist, Allan Sloan, quoting a Congressional Joint Committee on Taxation report, took a hard look at the revenue-raising claims made by the tax plan’s acolytes, including the editorial writers down the hall:

The idea of an excise tax on “Cadillac” health-care plans sounds like magic. It would raise almost $150 billion over 10 years to help finance health-care “reform”; it would be paid by employers, insurance companies and “the rich”; it would help “bend the cost curve” in the future; and for all I know, it might help regrow hair and cure warts.

But if you look at the actual workings of the plan, you come away far less impressed …

Why would employees be paying higher taxes on their income because of an excise tax on health care? I’m glad you asked. Even though the report doesn’t answer that question, I will.

Economists at the joint committee and most other places assume – I’ll repeat that: assume – two things. First, that to avoid this tax, employers will pay less toward health insurance than they otherwise would. Second, that the money employers don’t pay on health care will go to employees as higher salaries.

Call me skeptical – or cynical – but I find it hard to believe that any employer would pay more to employees if it paid less for health care. I also find it hard to believe that employers can work any harder than they already do to hold down health-care costs. But that’s the assumption underlying the idea that the tax will hold down future costs.

I’m sure that the people who believe in the virtues of this tax are acting in good faith. I just think that the real world of health care is different than their theoretical one …

In case you’re interested, this tax would not affect me in any serious way. And I’m not a catspaw for organized labor, which is opposing the tax. I just think it discriminates unfairly against people who are more expensive to insure because they’re older, live in high-cost areas or both. But if this excise tax can regrow hair … I’m willing to take another look.

Ultimately, the blind worship by Democrats of the excise tax that could destroy the Democrats’ election hopes is an anthropological mystery. It’s worthy of assigning a new Margaret Mead to study the strange folkways of Washington’s opinion leaders.

Moreover, the standard leftist critique for everything bad in Washington – all the power players are bought off by corporate donations and influence – doesn’t really apply to the punditocracy’s role in this debate. Yet, a desire to keep in the good graces of wealthy donors and executives might account for the senators’ reluctance to seriously consider the House’s approach to revenue-raising: taxing families earning more than $1 million a year.

Even so, why the lemming-like rush by some respected journalists and economists to embrace what critics see as a politically foolish, harmful and ineffective tax?

After all, it won’t significantly lower health care costs (the Commonwealth Fund found there’s “little empirical evidence” to back that notion up); it will add relatively little new revenues since most employers have said they’ll switch to cheaper plans while pocketing the savings instead of giving raises; and, as the respected Health Affairs reported recently, less than four percent of the differences in health plan costs are due to benefits, but higher costs are due far more to plans with older, sicker beneficiaries living in costly areas.

Even so, the excise tax measure in the Senate bill is still supported by unproven, fast-crumbling claims by true believers that it will raise $150 billion in revenue and dramatically cut health care costs. As Sloan and others, including New York Times columnist Bob Herbert, have noted, it turns out that 80 percent of the expected revenues is supposed to come from taxing future raises given to workers by altruistic employers after they cut health care spending. The push for the tax is abetted by the notion that pressuring employers to drop these more costly plans (above $23,000 for a family and $8,500 for an individual) will lead to sharp cuts in wasteful health spending.

Even as supporters continue to declare that their “faith” in their beloved tax on so-called “Cadillac” plans remains “ardent ” (as mocked by Eskow), the rising tide of political and policy challenges from unions, progressive Democrats on the Hill, polls, mainstream economists and scholars and even turncoat members of the pundit class may finally force President Obama and leading Democrats to rethink what critics have called political “poison.”

Yet, as the final shape of health legislation still remains to be decided, with the White House response to the push-back over the excise tax not yet settled, the puzzle over how such a bad idea could get so far is still unsolved. Eskow has his own theories: “I suspect the problem is an inability to reject an attractive idea, even when confronted with contradictory facts. There is a simple truth in the world of ideas: Theories can be beautiful. Reality can be ugly,” he said.

In his interview with Truthout, he pointed to some other possible factors appealing to policy wonks: “Much of the Beltway elite is so wedded to it because if you develop a professional profile based on certain theories, you want to see them put into action.” He added, “It’s being pushed so heavily by politicians because although it’s not really cost containment, it looks like cost containment. They don’t want it to be so obvious that there’s nothing much else in the bill that could bring down costs, except for future commissions,” including an independent Medicare advisory board, plus modest pilot programs with innovative payment approaches. In the view of Eskow and nonpartisan analysts, it’s questionable how many significant cost-containment reforms will be delivered by the Senate bill that lacks both a public option and tough national standards for insurance exchanges.

“They’re preserving a fiction,” he said of the cost-containment promises made for the excise tax, a criticism that could apply to essentially every claim for this miracle cure for what ails the health care system. “It’s all empty theory,” he observed.

But there is a grim real-world impact that could accompany all the high-flying theorizing behind the measure. As the Watson Wyatt consulting firm reported, the impact of the benefits tax would fall disproportionately on people who already face high out-of-pocket costs, including people who live in high-cost areas, women, older people and people suffering from chronic diseases. “Taxing groups in high cost areas and with high cost members could make health care unaffordable for many families that currently have employer coverage,” the researchers found.

In other words, as former Labor Secretary Robert Reich has observed, the tax could end up “defeating the entire purpose of health care reform,” even making things worse for those who already have health insurance.

That’s the sort of reality that the excise tax cultists would prefer to ignore as they prepare to worship once again at their shrine to the wrong-headed policy they want to create.

UPDATE: On the excise tax and other issues, the AFL-CIO is helping lead a progressive “national call-in day” for health reform:

Today is the AFL-CIO National Call-In Blitz for health care reform. Call 1-877-3-AFLCIO (1-877-323-5246) toll-free and urge your representative to support working families by voting for health care reform that:
• Does NOT tax our health care benefits;
• Requires employers to pay their fair share; and
• Reduces health care costs—the best way to do this is with a public health insurance option.