By Richard Rubin, CQ Staff
Feb. 22, 2010 -- President Obama's proposed methods of paying for a health care overhaul bridge the divide between the House and Senate versions of the bill and attempt to resolve some of the conflicts that have hung over the issue for months.
But it was unclear whether the plan Obama announced Monday had succeeded in designing a tax package that both House and Senate Democrats can support.
Obama would retain an excise tax on high-cost health insurance plans, a provision that House Democrats dislike, but he would delay it until 2018 and soften it. And, in a nod to those House Democrats, the president's version would lean more heavily on wealthy taxpayers by expanding the Medicare portion of the payroll tax to certain investment income.
The proposal would also make several changes to fees that would be imposed on various health care industries, and it includes a pair of revenue-raising provisions from outside the health care system.
Republicans, particularly in the House, seemed disinclined to debate the finer points of the policy changes, arguing that the entire White House framework is wrongheaded. Leading Democrats in both chambers also did not respond in detail to the specifics of Obama's revenue proposals, instead generally welcoming the ideas and looking forward to the administration's bipartisan meeting on health care policy scheduled for Feb. 25.
Excise Tax Changes
The excise tax has been controversial, particularly among liberals. Its inclusion in the Senate bill (HR 3590) has been one of the major sticking points in the long process of trying to develop a consensus bill that both the House and Senate can pass.
Union leaders who oppose the tax struck a deal with the White House earlier this year that would have delayed implementation of the tax for workers with collectively bargained plans and for state and local government employees. Obama's proposal would expand that delay to all workers, removing an argument that unions were getting a special deal and significantly reducing the estimated revenue from the tax.
As detailed in a White House summary, the new version of the 40 percent excise tax would affect plans for individuals costing more than $10,200 a year and plans for families above $27,000, up from $8,500 and $23,000, respectively. But the tax would start in 2018, not 2013 as in the Senate bill, so those are not particularly big increases. However, the new proposal also contains a potential adjustment to those thresholds if health care costs rise faster than expected in the interim period.
Like the previous versions, the thresholds would be indexed to the general inflation rate, plus 1 percent. Over time, because health care costs tend to rise more quickly than the rest of the economy, this provision would create pressure on more employers to reduce health insurance costs.
Companies that don't reduce premiums would have to pay the tax. Companies that do reduce premiums by increasing co-payments and deductibles would raise wages, some economists say, which would generate income and payroll taxes from workers. As a result, keeping the tax and pegging it to inflation help Democrats show that the legislation would reduce the federal deficit beyond the 10-year budget window.
To address concerns that high-cost plans have high premiums for reasons other than the generosity of their benefits, Obama's plan would adjust the thresholds based on the age and gender composition of each employer's workforce. It would also continue protections for workers in high-risk occupations. Unlike in the Senate bill, the thresholds would exclude the cost of dental and vision benefits.
Paul van de Water, a senior fellow at the liberal-leaning Center on Budget and Policy Priorities, said the general structure of the excise tax has not been altered. "The non-trivial caveat is that it loses a lot of revenue," he said. "But otherwise the basic features of the proposals are sound and unchanged, with the big improvement of the age and gender adjustments."
Rep. Joe Courtney, D-Conn., who has led the fight against the excise tax, said in an interview Monday that he appreciated the "tremendous progress" in shrinking the tax. But, he added, the whole issue should be set aside, given the uncertainty of imposing a tax that starts eight years in the future.
"Now we're left with a proposal that will not be going into effect until a year after the second Obama term in office, and four Congresses in between and a health care marketplace that nobody can predict where it's going to be," he said.
Making Up the Difference
Obama turned to several different pots of money to make up for the lower revenue that would result from his proposed changes.
Most notably, he wants to apply the Medicare portion of the payroll tax to investment income and passive income, like that produced from rental property, for individuals making more than $200,000 and married couples making more than $250,000. This income would be subject to the current 2.9 percent rate that employers and employees now pay together for Medicare. Some liberal groups and lawmakers have been calling for such a proposal.
Unlike the House-passed health care bill (HR 3962), which had a 5.4 percent surcharge on adjusted gross income for very wealthy taxpayers, Obama's proposal would not apply to active income earned from a business. That's an attempt to blunt criticism that the tax would unfairly burden small businesses.
However, the changes may still bring some criticism. Lawmakers such as Charles E. Grassley of Iowa, the ranking Republican on the Senate Finance Committee, have argued that expanding the payroll tax beyond wages might undercut the central social-insurance model of Medicare.
In addition to the new tax, Obama retained the Senate's proposal to impose a new 0.9 percent payroll tax on wage income for individuals making more than $200,000 and married couples making more than $250,000.
Obama also would raise, from $23 billion to $33 billion, the total of new fees on pharmaceutical companies, but he would delay a provision that would make that fee and others not deductible from the companies' taxes.
The president did nod to concerns from Grassley and other Republicans by proposing to delay the implementation date of a fee on health insurance companies until 2014, to align with the expansion in coverage that would benefit the companies. Republicans had complained that the fees in the Senate bill would cause premiums to rise in the first few years, before subsidies for coverage and other provisions of the bill would take effect.
Despite the Senate's insistence that the money for health care legislation come from within the health care system, Obama is proposing to raise nearly $30 billion by tapping two generally noncontroversial non-health care sources. He wants to codify the judicial "economic substance" doctrine that prohibits companies from making financial decisions solely for tax purposes. He also wants to curb paper producers' ability to claim a tax credit for making "black liquor," a byproduct that can be burned for energy.
Grassley and Senate Finance Chairman Max Baucus, D-Mont., had proposed using both of those revenue-raisers in their version of job-creation legislation, but Senate Majority Leader Harry Reid, D-Nev., dropped them from the scaled-back version (HR 2847) that the Senate took up Monday.
Feb. 22, 2010 -- President Obama's proposed methods of paying for a health care overhaul bridge the divide between the House and Senate versions of the bill and attempt to resolve some of the conflicts that have hung over the issue for months.
But it was unclear whether the plan Obama announced Monday had succeeded in designing a tax package that both House and Senate Democrats can support.
Obama would retain an excise tax on high-cost health insurance plans, a provision that House Democrats dislike, but he would delay it until 2018 and soften it. And, in a nod to those House Democrats, the president's version would lean more heavily on wealthy taxpayers by expanding the Medicare portion of the payroll tax to certain investment income.
The proposal would also make several changes to fees that would be imposed on various health care industries, and it includes a pair of revenue-raising provisions from outside the health care system.
Republicans, particularly in the House, seemed disinclined to debate the finer points of the policy changes, arguing that the entire White House framework is wrongheaded. Leading Democrats in both chambers also did not respond in detail to the specifics of Obama's revenue proposals, instead generally welcoming the ideas and looking forward to the administration's bipartisan meeting on health care policy scheduled for Feb. 25.
Excise Tax Changes
The excise tax has been controversial, particularly among liberals. Its inclusion in the Senate bill (HR 3590) has been one of the major sticking points in the long process of trying to develop a consensus bill that both the House and Senate can pass.
Union leaders who oppose the tax struck a deal with the White House earlier this year that would have delayed implementation of the tax for workers with collectively bargained plans and for state and local government employees. Obama's proposal would expand that delay to all workers, removing an argument that unions were getting a special deal and significantly reducing the estimated revenue from the tax.
As detailed in a White House summary, the new version of the 40 percent excise tax would affect plans for individuals costing more than $10,200 a year and plans for families above $27,000, up from $8,500 and $23,000, respectively. But the tax would start in 2018, not 2013 as in the Senate bill, so those are not particularly big increases. However, the new proposal also contains a potential adjustment to those thresholds if health care costs rise faster than expected in the interim period.
Like the previous versions, the thresholds would be indexed to the general inflation rate, plus 1 percent. Over time, because health care costs tend to rise more quickly than the rest of the economy, this provision would create pressure on more employers to reduce health insurance costs.
Companies that don't reduce premiums would have to pay the tax. Companies that do reduce premiums by increasing co-payments and deductibles would raise wages, some economists say, which would generate income and payroll taxes from workers. As a result, keeping the tax and pegging it to inflation help Democrats show that the legislation would reduce the federal deficit beyond the 10-year budget window.
To address concerns that high-cost plans have high premiums for reasons other than the generosity of their benefits, Obama's plan would adjust the thresholds based on the age and gender composition of each employer's workforce. It would also continue protections for workers in high-risk occupations. Unlike in the Senate bill, the thresholds would exclude the cost of dental and vision benefits.
Paul van de Water, a senior fellow at the liberal-leaning Center on Budget and Policy Priorities, said the general structure of the excise tax has not been altered. "The non-trivial caveat is that it loses a lot of revenue," he said. "But otherwise the basic features of the proposals are sound and unchanged, with the big improvement of the age and gender adjustments."
Rep. Joe Courtney, D-Conn., who has led the fight against the excise tax, said in an interview Monday that he appreciated the "tremendous progress" in shrinking the tax. But, he added, the whole issue should be set aside, given the uncertainty of imposing a tax that starts eight years in the future.
"Now we're left with a proposal that will not be going into effect until a year after the second Obama term in office, and four Congresses in between and a health care marketplace that nobody can predict where it's going to be," he said.
Making Up the Difference
Obama turned to several different pots of money to make up for the lower revenue that would result from his proposed changes.
Most notably, he wants to apply the Medicare portion of the payroll tax to investment income and passive income, like that produced from rental property, for individuals making more than $200,000 and married couples making more than $250,000. This income would be subject to the current 2.9 percent rate that employers and employees now pay together for Medicare. Some liberal groups and lawmakers have been calling for such a proposal.
Unlike the House-passed health care bill (HR 3962), which had a 5.4 percent surcharge on adjusted gross income for very wealthy taxpayers, Obama's proposal would not apply to active income earned from a business. That's an attempt to blunt criticism that the tax would unfairly burden small businesses.
However, the changes may still bring some criticism. Lawmakers such as Charles E. Grassley of Iowa, the ranking Republican on the Senate Finance Committee, have argued that expanding the payroll tax beyond wages might undercut the central social-insurance model of Medicare.
In addition to the new tax, Obama retained the Senate's proposal to impose a new 0.9 percent payroll tax on wage income for individuals making more than $200,000 and married couples making more than $250,000.
Obama also would raise, from $23 billion to $33 billion, the total of new fees on pharmaceutical companies, but he would delay a provision that would make that fee and others not deductible from the companies' taxes.
The president did nod to concerns from Grassley and other Republicans by proposing to delay the implementation date of a fee on health insurance companies until 2014, to align with the expansion in coverage that would benefit the companies. Republicans had complained that the fees in the Senate bill would cause premiums to rise in the first few years, before subsidies for coverage and other provisions of the bill would take effect.
Despite the Senate's insistence that the money for health care legislation come from within the health care system, Obama is proposing to raise nearly $30 billion by tapping two generally noncontroversial non-health care sources. He wants to codify the judicial "economic substance" doctrine that prohibits companies from making financial decisions solely for tax purposes. He also wants to curb paper producers' ability to claim a tax credit for making "black liquor," a byproduct that can be burned for energy.
Grassley and Senate Finance Chairman Max Baucus, D-Mont., had proposed using both of those revenue-raisers in their version of job-creation legislation, but Senate Majority Leader Harry Reid, D-Nev., dropped them from the scaled-back version (HR 2847) that the Senate took up Monday.