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Skepticism Over Long-Term Excise Tax Savings

While Senate leaders are touting the long-term savings in the second decade from health care reform – pegged by the CBO at $650 billion – this assumes no changes to the law to allow average-cost health care plans to avoid the excise tax, an extremely unlikely scenario.

There are several ways that the Senate health care bill saves money and reduces the deficit over time. Cuts of waste and fraud in Medicare and delivery system reforms to the government program, produced by an Independent Medicare Advisory Board which is given expanded power, is one way. On a conference call just now, White House chief health care policy advisor Nancy-Ann DeParle bristled at the suggestion that Congress would not go along with this Medicare restructuring, rejecting the idea that they would go the way of the sustainable growth rate, constantly fixed every year to avoid cuts to Medicare providers. “I ran the Medicare program during the Clinton Administration, I was there for the Balanced Budget Act, which produced the largest cuts to Medicare in history, and that happened. By the time we left, Medicare was solvent for the next 25 years. So I don’t see any reasons why the reductions won’t take place.”

DeParle did not address the excise tax on high-end insurance plans, which brings in a bulk of the deficit reduction over time. The way the tax is structured is this: the threshold for plans hitting the 40% excise tax is $8,500 for individuals and $23,000 for families. That gets indexed annually to inflation plus 1%, and there are higher thresholds for the plans of older Americans and Americans in certain jobs.

But over time, the plain reading of the CBO analysis is that the tax would hit more and more plans. Health inflation rises faster than regular inflation, even after the reforms in this bill. So health insurance plans get more expensive over time. Meaning that a “high-end plan” today would get closer to the average plan tomorrow. While economists assume that employers will be smart shoppers to avoid the tax, that can only happen at the margins if the overall cost of insuring employees raises higher than the threshold raises.

So in the second decade, we would see health insurance plans close to the average be eligible for the excise tax. But that’s if Congress does nothing.

The best analogy here is not the doctor’s fix, but the alternative minimum tax. The AMT was designed to ensure that high-wage earners who deducted away all their income would at least have to pay some tax. It started out hitting a very high wage. But over time, because of the way it was indexed, the AMT started hitting the upper-middle class. And Congress wouldn’t allow that. So every year, they add a patch to the AMT protecting those individuals. And there’s absolutely no reason to believe that the same dynamic wouldn’t occur with the excise tax. President Obama has routinely promised that people making over $250,000 a year wouldn’t be hit with higher taxes. As soon as the excise tax starts to violate that, Congress will act.

And they’ll slap each other on the back for it. But it makes those long-term projections of deficit reduction from health care reform meaningless. There may be a smaller savings as health care premium money, which is deductible, is converted into wages, which are not. But the notion that hundreds of billions will be collected by a tax on high-end plans is simply nonsensical.

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David Dayen

David Dayen