Math-Magical: The Mythic Savings In The Reconciliation Package

Congressional Democrats seem extremely pleased with themselves over how they fiddled with the design of an excise tax on employer-provided insurance that will not kick in for eight years (and then grow faster after another two years) to make it look like it will bring in a huge amount of money in the years 2020 through 2029. Given the incredibly stupid design of the excise tax to begin with, no one who understands politics should doubt for a second that this tax will ever go into effect as planned, or bring in this huge amount of revenue.

Let us leave the huge caveat that many think the inherent assumptions made by the CBO about the savings from the excise tax are very dubious. The claim from the CBO is that every dollar in reduced insurance benefits will result in exactly one dollar in increased in salary. I'm going to just focus on the many future political problems with the excise tax.

To make it look like the excise tax will bring in a huge amount of money, they have indexed the tax to only the consumer price index instead of the CPI plus 1%. This is far below health care inflation even in countries with very slow rates of increase in health care cost. What this means is, each year, the excise tax will likely hit more and more people until it gets to a point where even very basic insurance packages would run afoul of the excise tax. Also, the subsidies that those on the exchange get will get smaller and smaller. From the CBO report:

Relative to H.R. 3590, the reconciliation proposal would make a number of changes that would affect its longer-term impact on the budget. In particular, it would increase the subsidies offered in the new insurance exchanges and would reduce the impact of an excise tax on health insurance plans with premiums above certain thresholds. An important component of the longer-term analysis is that, beginning in 2019, the reconciliation proposal would change the annual indexing provisions so that the premium subsidies offered through the exchanges would grow more slowly; over time, the
spending on exchange subsidies would therefore fall back toward the level under H.R. 3590 by itself. Another key component of the longer-term analysis is that, beginning in 2020, the reconciliation proposal would index the thresholds for the high-premium excise tax to the rate of general inflation rather than to inflation plus one percentage point.

These "savings" from these changes are nothing more than accounting sleight of hand--the issue of dealing with these changes is simply kicked down the road by ten years.

If the excise tax were only a cap on the amount of insurance benefits that are tax deductible, this might (and that is a huge might) possibly work out. People would just be paying more and more taxes on the health benefits package from their employer each year, but the quality of the packages could stay the same. Of course, even that would probably cause a political uproar, resulting in the tax continuously being “fixed,” just like the AMT.

The problem is that the excise tax is a flat tax of 40% on the value of the entire insurance package. It is not even a set cap on the value the employer pays for. This 40% rate is higher than many Americans marginal tax rate. This means that it simply does not make sense for an employer to ever offer employees the choice of an insurance package that costs more than the new excise tax limit. This would make it effectively impossible for many people with employer-provided coverage to buy a quality insurance package, even if they were willing to pay more in premiums with post tax dollars. If you actually wanted a tax to remain intact for the next twenty years, this is not how you would design it.

The excise tax's design was foolish in the first place, and, in some ways, it has only gotten worse with this reconciliation package. Of course, the tax does not kick in for 8 years, so it is some future Congress’s and future President's problem. Nothing says fiscal responsibility more than dumping a huge political mess on your successors.

There is simply no way to believe, given its ill convinced design, that this will not be heavily modified or scrapped in the future. Democrats might be proud of their “math-magical” CBO score showing huge deficit reductions in the next twenty years, but I don't think anyone should boast about illusions that will never come true. This second decade projections are based on the false assumption that a poorly thought-out, huge, new tax will remain completely unchanged for the next two decades. The changes might be needed for process reasons, but Democrats should not proudly brag like they will actually happen.

This is the equivalent of a president saying they have a twelve-year plan to end the budget deficit. He can just propose a bill now that says taxes will remain the same for the whole eight years of his presidency, followed by everyone's taxes jumping to an 92% tax rate the year after the president leaves office.