A Hill friend asked me what I thought of Senator John Kerry’s (D-MA) idea to tax health insurers if they charge above a certain amount for health insurance.

As I understand it, Senator Kerry’s idea is to tax health insurers. The tax would be:

tax on an insurance company = 35% X (the premiums they charge their customers above $25,000 for a family policy)

So if an insurer sells a family policy for $15,000, there is no new tax. If instead the insurer charges $27,000 for a family policy, the insurer would pay Treasury 35% X ($27,000 – $25,000) = $700 on this one policy.

In reality, the calculation would be done in the aggregate. The insurer might sell insurance to a company for 1,000 super-expensive family policies for $27,000 each, and pay Treasury 1,000 X $700 = $700,000.

I believe the insurer would pass most (all?) of these costs along to the purchaser of insurance. We used to have a 3% telephone excise tax that was technically imposed on phone companies. Those companies just added it to your bill and passed the taxes through to their customers. I believe the same would happen here, so Senator Kerry’s proposal would result in higher premiums for those who now buy very expensive health insurance policies.

You should know that $25,000 is incredibly high. Average annual health insurance premiums for a family were about $15,000 in 2007. I assume they’re in the $16,500-ish range now.

I had drafted a long wonky post that waded into the details of this, but it got too weedy. I will therefore gloss over all the detail and just offer my conclusions, which are highly personal. Sometimes I’m trying to convince you of facts or analysis that I am convinced is analytically and provably correct. Here I am instead offering a personal policy judgment. For what it’s worth, here are …

My conclusions on the Kerry proposal

  • My first choice would be to repeal the current law tax exclusion for employer-provided health insurance and replace it with a flat standard income tax deduction for the purchase of health insurance.
  • I think capping the exclusion at a high premium level, like the $25K being discussed by some Finance Committee members, is silly, wimpy, and weak. I also think it’s foolish legislative politics, because you get probably half the political cost of repealing the exclusion, but only a small fraction of the policy benefit. But if they used the revenue to do a standard tax deduction, I would support it as better than nothing (if they index it correctly going forward). I’d be willing to discuss using the revenues raised for a flat health insurance tax credit, too.
  • The Kerry proposal is quite similar in effect to capping the individual exclusion at $25K. It’s not identical, because the 35% applies to everyone regardless of income. It’s klunky and inefficient and far less transparent than just capping the exclusion, so I think it’s only marginally better than nothing, and only if the revenues raised are used to cut other taxes. The mechanism also muddies the incentives and creates market distortions, which further undermines my enthusiasm.
  • I think the Kerry proposal is designed to have a similar effect to capping the exclusion, without provoking the same union opposition that has killed most Congressional Democrats’ ability to support a capped exclusion. This surprises me because the effects are so similar (but not identical). If unions oppose capping the exclusion because they don’t want to raise taxes on their members’ health insurance premiums, why does Senator Kerry think they would be OK with a policy that will result instead in higher health insurance premiums and lower wages by roughly the same amount?
  • Any of these three options would mean more tax revenues for the government. I draw a bright line that any higher taxes should be returned to the private economy through lower taxes. I would do that through a standard income tax deduction for the purchase of health insurance. In the common raw political vernacular, I oppose “tax-and-spend” policies even if they are deficit-neutral. So I could be OK with a capped exclusion, and I could swallow the Kerry tax proposal, but only if the revenues are not funneled into a new government spending program. This is where the Finance Committee closed-door discussions leave me behind: all of the discussions are higher-taxes-for-more-spending, and I strongly oppose that.
  • Senator Kerry appears to be trying to come up with something that raises revenues in a way that Republicans can swallow, and that functions similarly to (but less effectively than) a capped exclusion, while tiptoeing past the unions. Clever non-transparent policies with muddled incentives are generally bad ideas with even worse unintended consequences. And I strongly oppose the idea if the higher taxes are used to expand government health spending programs (like Medicaid).

While I appreciate the legislative creativity that appears to be behind Senator Kerry’s attempt to broker a legislative compromise, I would oppose this policy change. I’m just not a tax-and-spend guy.

(photo credit: kerry.senate.gov)