Obamacare and tax reform: A Progressive double play (Part III -- now with bonus Ted Cruz and Koch brothers coverage)

This is the third in a series of posts about paying for the Affordable Care Act. The first two posts can be found here and here.

Let’s talk about your dream tax loophole closings.

Would you like to close a narrow subsidy benefiting the paper industry and have the Koch brothers kick in a few bucks to subsidize your shiny new insurance policy you purchased on the exchanges?

Perhaps you’d like to see Ted Cruz and Goldman Sachs negotiate how to split a $5,000 tax increase that will help expand Medicaid?

If you answered “yes” to either of those questions, you’re in luck – the Affordable Care Act does both.

(Maybe the next round of reforms can get the corporate jet loophole – we’ll keep working on it)

Follow me below the fold for a rundown of some of the major tax loopholes the ACA closes to help fund it. As always, numbers come from the Joint Committee on Taxation and much of the inspiration and analysis comes from John McDonough.

Loophole I: Limiting the Health Insurance Exemption (aka the "Cadillac Tax") $32 billion

The first loophole closure is actually an excise tax, but it functions to considerably narrow the exemption of employer-provided health insurance offerings.

Unlike regular wages, which are subjected to both payroll and income taxes, employer-provided health insurance is compensation that is tax free. There are two particular tax benefits. First, any employer contribution is tax-free compensation. Second, any employee use pretax dollars to pay for contributions to premiums or a health savings account. Both essentially function as large tax deductions that generally benefit more well-off people. The higher position you hold, the more likely it is that you have access to an employer plan, the more generous that plan is likely to be, and the more likely it is that an employer will pay for all of the costs. Take our dear friend Sen. Cruz, whose family is covered gold-plated health plan worth up to $40,000 paid for by his wife’s employer, Goldman Sachs. (Compare that to the annual premium value of a standard Premier Care plan at the University of Michigan, which runs $16,932 and is a quite good value).

Economists fear that these tax-free plans create incentives for employers to put money into health benefits and not wages, disproportionately favoring investments in health care, which in turn leads to overspending on health care and excess care and inflation in the health sector.

The idea is that placing an excise tax on plans in excess of a certain threshold (slated to start at $10,000 for an individual and $27,500 for families in 2018), will force employers to re-evaluate how they compensate their employees. Goldman Sachs would owe roughly $5,000 on Cruz’s family plan, which they no doubt would offload part of on the employee . (Note, that this representation isn’t exactly correct, because the ACA regulations in question actually define the tax value of a plan differently than it’s raw premium cost, but you get the idea)

The tax also broadly redistributes benefits from people who have excessive health insurance to those who don’t have any and will benefit from subsidies on the exchanges or enroll in Medicaid.

So far, so good: We’ve raised Ted Cruz’s taxes (indirectly because the excise tax would fall on Goldman-Sachs, but it still feels satisfying). So why are many progressives worried about this tax?

As it turns out, they have several very real concerns.

First, many of the most expensive plans actually belong to small businesses, who have small insurance pools and can’t spread their risk over large numbers of employees. Ditto for employers whose employee pool consists of older, sicker, more female or high risk professionals (like firefighters).

The structure of the ACA does mitigate some of those risks, by allowing adjustments for high risk professions and giving small business owners access to the broad risk pools of the exchanges, while banning discrimination based on gender and limiting it for age. It also delays the onset of the tax to 2018 to allow employers to adjust, and unions with strong health plans to renegotiate contracts.

Assuming those things go smoothly (which is a big assumption) the tax is a win-win. If it ends up biting some health-insurance plans, it means that the proceeds will fund people who don’t have health insurance. If Cadillac plans get renegotiated to the point where they stay under the taxable threshold, it means that health care inflation is slowing drastically.  

Indeed, slowing increases in health insurance inflation has already led the CBO to downgrade projected revenue from the excise tax.

Loophole II: Narrowing Cellulosic Biofuels Provider Credit ($27 billion)

Yes, ethanol tax credits even made their way into health reform (kind of).  This closes a loophole opened by a 2009 IRS ruling indicated that certain unprocessed wood byproducts called “black liquor” (really) used to power some paper plants. Democrats wanted to close this loophole and used the savings to help pay for the ACA. So when you get your new exchange policy, send Georgia Pacific or your favorite paper manufacturer a thank-you note because a couple of bucks of your subsidy came from them. I’m sure the Koch brothers will appreciate it.

Loophole III: Improving corporate reporting.  ($17 billion)

This provision imposes more detailed requirements on corporations reporting payments to contractors to help the IRS more accurately assess the contractors’ tax liabilities, which apparently seem currently to be, er, somewhat "under reported" as the lawyers might say. Corporations lobbied hard against this change…. and were ignored by Congress. The happy result? Starting this year, businesses are going to be paying $2 billion more a year to the Federal Government that they should have been paying anyway, and the proceeds will help poor and working class Americans get health insurance.

UPDATE: This provision was repealed in 2011.

Are you seeing the theme here? (Yes, elections DO make a big difference, don't they?)

Loophole IV: adjustments to Health Savings Accounts, tax deductions for medical care and Flexible Spending Arrangements ($33 billion)

This group of changes limits tax-deductible contributions to HSAs FSAs to $2,500 and limits the definition of medical services that can be paid for with HSAs for FSAs.  HSAs and FSAs allow people to save pretax dollars to pay for medical expenses. Since working-class people generally live paycheck to paycheck and can’t save much money, they generally can’t take advantage. Other changes increase the floor for tax deductions for medical expenses.

So adding up here, we get approximately $110 billion in additional tax revenue from the well-off to fund access to health care for poor, working-class and middle class Americans through the end of the decade. That’s about 11 percent of the costs of Obamacare during that time. 

Check in tomorrow for the final installment when I examine budget cuts.