Hawaii, Employer Mandates, and Taxing ESI through Premium Excise Taxes

The other day I mentioned about Hawaii's employer mandate. Now I offer a study from the Federal Reserve Bank of San Francisco that states that it probably does not affect employer choices.

Next, there is an article in the Washington Post warning people not to make too much of the taxation of employer sponsored insurance. There are the classic arguments in there that how can something we hate, like going to the doctor, actually lead to runaway costs? The real matter is that it is subsidized, and instead of going in and desiring something just as effective, we want something with all the bells and whistles. Rather than caring about the cost differential, we instead push for the most expensive things or look toward places that are perceived to have higher quality, but just cost more. Boston serves as a great case where community hospitals that are lower cost have just as much quality as the name-brand academic medical centers, but things go there, and since the insurance covers it the same, then too bad.

That said, cost-sharing under a rich comparative effectiveness scheme could help sort of pierce this disconnect. That is, if you want the more expensive service, you have to pay a larger share or some sort of a differential, unless you can meet some burden of necessity. This is just a rambling idea.

Perhaps a better rebuttal to the reporting article is a column by David Leonhardt in the NY Times, stating that ESI is the core of the problem, and is the only real revenue source that grows as health care costs grow.

The fact of the matter is, that at the end of the day, the ESI exclusion of I.R.C. § 105 is just not good. It creates weird distortions.

Now as for ending it, politically the sell is difficult. One route to fixing it is instead of taxing the actual insurance itself is to institute a premium excise tax. Some of the liberal community like this idea, because it targets the hated insurance companies, and stands a chance at passing. Needless to say, one should never discount political arguments.

However, ever the tax person, I worry first that it does get passed onto people, just indirectly. First off, it is regressive. Even if you have a large exclusion, as the reports indicate, everything is at a flat rate above it. This is a two-bracket system rather than the I.R.C.'s structure of 4 brackets. There is nothing to say then that the costs could not just pass through to consumers evenly throughout the insurance group, leading to something regressive.

Of course, this could act as the old Pete Stark statement about a regressive tax for progressive ends, which health reform would serve. However, I have another concern about the administrability of such a proposal. Has anyone thought again about the valuation matters here? How do you determine which plans are worth that much? Since it is an excise tax, perhaps valuation is less of an issue, however, you have to ask how the IRS would collect such data as to how much tax to charge a company in this regard. Again, you have the IRS implementing something that could have administrability challenges, but unlike caps on ESI straight-forward are actually regressive.

A great analysis of the equity portion of this proposal comes from Len Burman at the Tax Policy Center.