Ron Brownstein, a journalist who pays special attention to health policy and politics, writes today on the McCain plan. He says rightly that the erosion of risk sharing is one of the worst features of the plan—that it encourages younger, healthier workers to leave employment-based coverage for the individual market, thus destabilizing the more efficient risk pooling of employer coverage. Brownstein also rightly says that “the bedrock goal of Obama’s plan is to reinforce sharing of risk and cost between healthy and sick, young and old.”
But Brownstein says that the Obama’s campaign’s description of the McCain plan as the “largest middle-class tax increase in history” is just “flat wrong”. Usually Brownstein makes a lot of sense but this time it is Brownstein that is wrong.
The McCain plan would say that if you get health insurance on the job, you would have to pay income taxes on the value of what your employer contributes to your health insurance. And until a few days ago, the McCain folks seemed to be saying it would also be subject to payroll taxes like FICA (Social Security and Medicare taxes). It was only after Obama called this the largest middle class tax increase in history that the McCain folks clarified (or shifted) their position so that employee health benefits would only be subject to income taxes.
Brownstein cites the Tax Policy Center, another outfit we have a lot of respect for, to prove his point that the McCain plan is not a tax increase. Economists seem to be overlooking two key points:
First, Americans, especially those below median income, have faced wage stagnation in the last decade. The notion that somehow employers will make up the difference if health benefits are taxed is just not plausible to many real people given their actual experience in the real world of work. Economists assume that health benefits are just part of compensation and that if health benefit costs decline, wages will increase. That may be true for the upper end of the labor market but is it true for most of the middle class that has faced stagnating wages and declining benefits? Or will it be a new tax with no compensating increase in income?
Second, for many of us, a tax credit of $5,000 for a family is nowhere near enough to cover the cost of coverage. If the average job-based premium is now almost $13,000, there are lots of places in this country where health care costs are higher than average. And there are lots of people for whom premiums are higher than average—if you are over 40 or 45 or if you have health conditions like high blood pressure or asthma or diabetes or if you are overweight. In 45 states, insurers price premiums higher based on age and health status. The McCain plan not only does not fix that problem, it encourages insurers to do the worst version of that because it allows insurers to compete nationwide, sweeping aside whatever protections advocates have won in the various states.
Sen. Obama says that with one hand the McCain proposal gives you a tax credit but with the other, it imposes taxes on your health benefits. That is true. And what is also true is that many people will not come out ahead on the deal—and that is even before the implosion of employer-based coverage that not only Brownstein, but the US Chamber of Commerce and other business groups consider likely.