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Tuesday
Jan282014

The Senate GOP's Cadillac And Honda Civic Plan Tax

Yesterday Republican Senators Orrin Hatch (UT), Richard Burr (NC) and Tom Coburn (OK) released a proposal for health-care reform. Some commentators are suggesting that Hatch-Burr-Coburn is an incremental approach in that while it “would not usher in a free market for health insurance,” it would “offer individuals more freedom than now exists under Obamacare.”

I’m all for incrementalism as long as it is in a direction of greater liberty.  Further, the plan does have some good parts such as capping Medicaid funds and giving states greater flexibility to experiment with Medicaid, and a tax credit for the purchase of health insurance (although the tax credit needs to apply to everyone, not just those at 300% of the federal poverty level or below.)  Hatch, Burr and Coburn should also be praised for providing examples (albeit hypothetical ones) about how their plan would impact individuals and families.  This “telling stories” is a crucial tactic in passing any piece of major legislation.  Democrats do it all the time, so it’s good to see the GOP finally trying to sell policy this way.

That said, their proposal has a big flaw, what might be called a “de facto Cadillac plan tax.”  Under ObamaCare, the Cadillac plan tax is an excise tax that applies to pricier insurance plans:

A 40 percent excise tax will be assessed, beginning in 2018, on the cost of coverage for health plans that exceed a certain annual limit ($10,200 for individual coverage and $27,500 for self and spouse or family coverage). Health insurance issuers and sponsors of self-funded group health plans must pay the tax of 40 percent of any dollar amount beyond the caps that is considered “excess” health spending.

The Hatch-Burr-Coburn plan goes beyond that.  It “caps the tax exclusion for employee’s health coverage at 65 percent of an average plan’s costs” (italics added).  In 2013 the average employer-based plan cost about $5,884 for an individual and $16,351 for a family (see page 2).  Under Hatch-Burr-Coburn, any individual would be taxed at the marginal income-tax rate on any dollar of his heath plan that exceeded $3,825 ($5,884 multiplied by 65%).  For a family, it would be any dollar that exceeded $10,628.

In short, this legislation doesn’t just hit “Cadillac” plans.   It also taxes Honda Civic, Ford Focus and Toyota Corolla plans.  

I don’t see how this can be sold politically.  First, the ObamaCare Cadillac plan tax hasn’t proven popular, and it only hits a small percentage of plans, at least initially.  Legislation that taxes every health plan that’s above the average, and even many that are below, would be hugely unpopular.  “If you like your health plan, you can keep your health plan as long as you don’t mind paying new taxes on it,” isn’t a winning slogan.  Finally, recall that Obama hit McCain over the head in 2008 for offering a health care plan that, in effect, raised taxes on health benefits.  You can expect Democrats and liberals to launch a similar attack on the Hatch-Burr-Coburn plan should it ever become THE “Republican plan.”

In short, the Hatch-Burr-Coburn plan asks conservatives and libertarians to take incremental steps toward a free market, but then adds a 500 pound weight to our backs, thereby making it impossible to take any steps at all.  The GOP can do much better. 

UPDATE: After talking with some Senate staffers, it was clear I did not describe the tax portion correctly.  Here is a new post describing it with my thoughts.

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