An Excise Tax On Health Insurance Benefits Is Middle Class Regressive

An excise tax on high-end health insurance benefits is an extremely regressive tax on the middle class. Even though Ezra Klein claims this tax is progressive, it is not. It would raise relatively little money from the wealthy.

It is true that the bottom 30% is unlikely to pay very much of the new excise tax, but ,by the same token, the top 0.1% will pay almost none of it either. As Klein admits, the very most expensive insurance plans for CEOs are worth maybe $40,000. While that is a lot, it is only three times as much as an average family insurance plan's $13,375. On the other hand, a CEO's financial compensation could easily be more than 50 times as much as an average family's salary.

According to the Kaiser Family Foundation, very few plans (roughly 2-4%) are currently over the $21,000 for family (and $8,000 for individual) threshold, but premiums are increasing at around $800 a year and the threshold for the cap is only pegged to the consumer price index. In the first few years, the tax on benefits would hit only a few families, but by 2019 it would affect around 40% of insurance plans that would otherwise have been offered.

Teachers, policemen, firemen, coal miners, union members all tend have very generous health insurance. For the top 0.1% of income earners (people making over $2,000,000 a year) in this country, health insurance benefits are a tiny percentage of overall compensation. For many middle class families, health insurance benefits are a significant portion of total compensation. Placing an excise tax on health insurance worth over $21,000 will hit the middle class much harder.

For example in 2019, let's assume a CEO makes $3 million a year and has a family health insurance plan worth $43,000. Whether or not he pays the excise tax or has the money converted to income, he is paying taxes on an extra $22,000. That is only a 0.7% increase in the amount of taxable earnings for the CEO.

On the other hand, picture a coal miner, policeman, or fireman making $65,000 a year with a family health insurance plan worth $27,000. He will be paying taxes on an additional $6,000 of his earnings. For the middle class family, that is a whopping 9% increase in the amount of their earnings which is now taxable.

In 2019 the tax on benefits should generate--at most-- two to three percent of its revenue from the richest 0.1% of households. By contrast in 2007, 12.3% of the nation's income went to the 0.1% richest people in the country. Relative to their income, the tax on benefits would generate very little from the richest Americans. A flat, across-the-board, 1% tax on all earnings would generate a dramatically greater proportion of its revenue from the richest Americans than this new excise tax on health insurance benefits.

Some people argue that ending the tax-exempt status of health insurance is a good policy necessary to reduce the growth in health care spending. (I personally dispute that this is a major factor in cost, and think the basis for the claim is shaky at best.) But by no standard can I accept calling a tax progressive when it disproportionately favors millionaires over middle class Americans.