Hearing on Medicare Premium Support Proposals

Comments for the Record

House Committee on Ways and Means

Subcommittee on Health

Friday, April 27, 2012, 9:00 AM

by Michael G. Bindner

The Center for Fiscal Equity

Chairman Herger and Ranking Member Stark, thank you for the opportunity to submit my comments on this topic.  

The whole purpose of social insurance is to prevent the imposition of unearned costs and payment of unearned benefits by not only the beneficiaries, but also their families.  Cuts which cause patients to pick up the slack favor richer patients, richer children and grand children, patients with larger families and families whose parents and grandparents are already deceased, given that the alternative is higher taxes on each working member.  Such cuts would be an undue burden on poorer retirees without savings, poor families, small families with fewer children or with surviving parents, grandparents and (to add insult to injury) in-laws.

The key issue for the future of health care finance is the impact of pre-existing condition reforms on the market for health insurance.  Mandates under the Affordable Care Act (ACA) may be inadequate to keep people from dropping insurance - and will certainly not work if the mandate is rejected altogether for constitutional reasons.

If people start dropping insurance until they get sick – which is rational given the weakness of mandates – then private health insurance will require a bailout into an effective single payer system. The only way to stop this from happening is to enact a subsidized public option for those with pre-existing conditions while repealing mandates and pre-existing condition reforms.

In the event that Congress does nothing and private sector health insurance is lost, the prospects for premium support to replace the current Medicare program is lost as well. Premium support also will not work if the ACA is repealed, since without the ACA, pre-existing condition protections and insurance exchanges eliminate the guarantee to seniors necessary for reform to succeed. Meanwhile, under a public option without pre-existing condition reforms, because seniors would be in the group of those who could not normally get insurance in the private market, the premium support solution would ultimately do nothing to fix Medicare’s funding problem.

The alternative of single-payer catastrophic insurance with health savings accounts would not work as advertised, as health care is not a normal good.  People will obtain health care upon doctor recommendations, regardless of their ability to pay.  Providers will then shoulder the burden of waiting for health savings account balances to accumulate – further encouraging provider consolidation.  Existing trends toward provider consolidation will exacerbate these problems, because patients will lack options once they are in a network, giving funders little option other than paying up as demanded.

Bruce Bartlett wrote in the New York Times Economix Blog on May 17, 2011 on the nature of the Medicare financial problem and how to fix it. The information he imparted is invaluable, however I disagree with his solution, which is to stop doing the Doc Fix. He relates that the ACA expansion of funding brought the Hospital Insurance Trust Fund (Part A) into balance, with parts B (doctor visits) and D (Drug coverage) responsible for most of the unsustainable cost growth, as patient premiums are set to 25% of program costs and with drug coverage premiums covering even less.

The Center believes that stopping doctor bills from going up on the demand side will not work. We know that because it did not work for Medicaid - since restricting payments have stopped most doctors from taking Medicaid). This finding has a great deal of impact on what is possible in preventing the doctor fix.

The problem with Medicare Part B is that increases cannot keep up with costs, like they do in the private market, because doing so violates the commitment to not cut Social Security benefit checks. The cost of living adjustment must be high enough to cover the premium increase each year - although for many that is all it does. Further cuts bring up the specter of seniors eating cat foot to make ends meet, hence the reason that the Fiscal Commission was called the Cat Food Commission by progressives.

Premium support and not patching doctor fees are attempts to make doctors restrict their costs - both to seniors and overall. Prices naturally rise more quickly than inflation because these services are subsidized, so any co-pay must be increased to slow demand from users in exactly the same way the market would without subsidies or insurance. The desire to make doctors pay more is a recognition that the main impact of both insurance and subsidies (and subsidies for insurance) is higher income for doctors and a larger medical care sector than would otherwise occur in a free market.

Our hybrid system is the most expensive option - either going to much less comprehensive insurance for everyone or an entirely governmental system would be cheaper, but is politically untenable (at least until private insurance collapses or is eventually supplanted by an ever expanding public option).

Going after doctors still won't work, however, as the Medicaid experience clearly shows. Premium support is a way to have insurance companies go after doctors instead, but that will likely yield the same result.

Making patients more conscious of their care might do the trick, both with more realistic premiums for Part B and Part D, with both rising to absorb half the cost - although premiums could be lowered by increasing co-pays and providing seniors with Flexible Spending and/or health savings accounts. The problem is that this is untenable when dealing with a population with largely fixed incomes. That problem, however, is not unsolvable.

The obvious solution, which no one has yet suggested, is to change how COLAs are calculated, moving from the wage index to an index based on what seniors actually buy - especially health care. If premiums were increased quickly, COLA changes would have to be as rapid.

Such a proposal would hasten the date that the Old Age and Survivors Insurance fund needs rescue. It also impacts lower income seniors to a greater extent than higher income seniors, since they have less left over after any mandatory co-pay. Either bend points would have to be reset or the entire complicated system of bend points would have to be replaced a new method of crediting contributions, where employer contributions are credited equally rather than as a match to the employee contribution - thus moving redistribution from the benefits side to the revenue side.

An average employer contribution would provide even more incentive for increasing the amount of income subject to benefits, at least for the employer contribution.  Of course, if you do the latter, we might as well simply use a Net Business Receipts Tax or a VAT to replace the employer contribution (which captures all income with the latter burdening imports as well)

Shifting to more public funding of health care in response to future events is neither good nor bad.  Rather, the success of such funding depends upon its adequacy and its impact on the quality of care – with inadequate funding and quality being related.

Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding).  

We will now move to an analysis of funding options and their impact on patient care and cost control.

The committee well understands the ins and outs of increasing the payroll tax, so we will confine our remarks to a fuller explanation of Net Business Receipts Taxes (NBRT). Its base is similar to a Value Added Tax (VAT), but not identical.

Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.  The key difference between the two taxes is that the NBRT should be the vehicle for distributing tax benefits for families, particularly the Child Tax Credit, the Dependent Care Credit and the Health Insurance Exclusion, as well as any recently enacted credits or subsidies under the ACA. In the event the ACA is reformed, any additional subsidies or taxes should be taken against this tax (to pay for a public option or provide for catastrophic care and Health Savings Accounts and/or Flexible Spending Accounts).

The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities. Employers who fund catastrophic care or operate nursing care facilities would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but no so much that the free market is destroyed. 

This proposal is probably the most promising way to arrest health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.

The NBRT would replace disability insurance, hospital insurance, the employer contribution to old age and survivors insurance, the corporate income tax, business income taxation through the personal income tax and the mid range of personal income tax collection, effectively lowering personal income taxes by 25% in most brackets.   Note that collection of this tax would lead to a reduction of gross wages, but not necessarily net wages – although larger families would receive a large wage bump, while wealthier families and childless families would likely receive a somewhat lower net wage due to loss of some tax subsidies and because reductions in income to make up for an increased tax benefit for families will likely be skewed to higher incomes. For this reason, a higher minimum wage is necessary so that lower wage workers are compensated with more than just their child tax benefits.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.

Hearing on Certain Expiring Tax Provisions

Comments for the Record

House Committee on Ways and Means

Subcommittee on Select Revenue Measures

Hearing on Certain Expiring Tax Provisions

Thursday, April 26, 2012, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Tiberi and Ranking Member Neal, thank you for the opportunity to submit these comments for the record to the House Ways and Means Committee Subcommittee on Select Revenue Measures. 

Doing nothing is a possible solution to almost every issue, especially expiring tax provisions.  While this is possible, it is not likely, as each of these provisions has adherents, as testimony, comments submitted for the record and calls to staff have likely demonstrated.  If the economy is more robust in December than current forecasts suggest, there is always the possibility that these provisions will be allowed to expire by the President with all other temporary tax provisions if the House majority proves intransigent on negotiations to increase revenue.  Indeed, the hint that he might do so may be the strongest impetus to compromise, as wealthier citizens have much more to lose from letting the Clinton era tax rates concern than the average taxpayer. 

Congress and the Administration could do the minimum required.  Sadly, this is the most likely scenario given the state of the national economy.  The most likely way is to delay action until after the election and, as a package, extend the debt limit through December 2013 in exchange for extending the expiring income, payroll, unemployment and medical payment provisions for an equal period of time, including extending the temporary tax provisions while accepting the temporary pain of one year of sequestration. 

A slightly more ambitious version of this scenario, which leaves less to chance as far as the impact of the election (as a lame duck President has no interest in any compromise at all) is to extend the debt limit, doc fix suspension, temporary expiring tax cuts, the payroll tax cut, extended unemployment and tax rates for middle class and wealthy taxpayers through December 2013 in exchange for making certain tax cuts for lower income Americans permanent, including the 10% tax rate and expanded Child Tax Credit – offsetting some or all of the spending cuts that have already been agreed to.  This allows discourse on tax reform without holding our most vulnerable citizens hostage.

Should the President indicate that he is likely to let gridlock rule the day, a medium ball solution is more likely.  Opposition to a balanced solution will evaporate should he hint he will accept automatic tax cuts increases, as major Republican donors tell their members to compromise.  The balanced solution is some combination of the cuts and tax reforms supported by the majority of the Fiscal Commission, also known as Bowles-Simpson, and the proposals of the Bipartisan Policy Center, also known as Rivlin-Domenici.  Many of these proposals are similar and where they coincide seems like a fruitful place to start drafting legislation.  Using the congressional budget process to begin enacting these provisions could occur in regular order, with the Department of the Treasury playing a supporting role in writing tax reform language.  Under such a scenario, many expiring tax provisions could fall, but this is less likely without radical change.

The large ball game would be to actually balance the budget and enact radical reform in entitlement revenue and spending provisions, a shift from income taxes for most filers to consumption taxes and higher tax rates on those most ability to pay.  The Center for Fiscal Equity proposes a large ball solution with four major provisions:

·        A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.

·        Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments.  Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.

·        Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.

·        A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

Under this scenario, many temporary tax provisions would no longer be needed, since the nature of the tax code would change.  With the expiration of the corporate income tax, provisions granting exceptions to it would not longer be necessary and would stick out like a sore thumb when attached to any kind of consumption tax covering both wages and profits.  Likewise, the income surtax we propose will have few, if any, deductions.  Radical reform is the surest way to overcome resistance to allowing tax extenders to permanently expire.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.

Hearing on the Impact of Limitations on the Use of Tax-Advantaged Accounts for the Purchase of Over-the-Counter Medication

Comments for the Record

House Committee on Ways and Means

Subcommittee on Oversight

Hearing on the Impact of Limitations on the Use of Tax-Advantaged Accounts

for the Purchase of Over-the-Counter Medication

April 25, 2012, 2:30 PM

by Michael G. Bindner

The Center for Fiscal Equity

Chairman Boustany and Ranking Member Lewis, thank you for the opportunity to submit my comments on this topic. We largely agree that limiting tax advantaged plans is not a good move for cost cutting, provided that use of these accounts do not adversely affect access to care. Sadly, there were problems with these vehicles even before passage of the Affordable Care and Patient Protection Act. While the Center is in favor of undoing these limits as part of reform, it is unwise to simply undo the act to return to a bad status quo.

The real danger to the success of the Act is the possibility of the failure of private insurance generally. The key issue for the future of health care consolidation is the impact of pre-existing condition reforms on the market for health insurance. Mandates under the Affordable Care Act (ACA) may be inadequate to keep people from dropping insurance - and will certainly not work if the mandate is rejected altogether for constitutional reasons.

If people start dropping insurance until they get sick – which is rational given the weakness of mandates – then private health insurance will require a bailout into an effective single payer system. One way to stop this from happening is to enact a subsidized public option for those with pre-existing conditions while repealing mandates and pre-existing condition reforms. Another alternative is to pass single-payer catastrophic insurance featuring both Health Savings and Flexible Spending Accounts – however these should be used in concert, with one card (in former days called a Health Security Card) accessing both the catastrophic plan, the HSA and the FSA.

Flexible spending accounts, especially self financed ones, can be used to end the debate over services that some insurers or religious employers do not believe in funding, from acupuncture and cranio-sacral therapy to contraception and abortion, as well as over the counter medications and even medical marijuana in states where it is legal (which is a growing number). Of course, these accounts could also be limited to the gap between the catastrophic deductible, the available HSA balance and needed costs, although once you reopen the door to OTC medications, it will be hard to stop others from piling on.

Ideally, the system should fund both a public option for people who cannot get care because of cost or pre-existing conditions, allowing others to keep their employer provided care and covering the remainder with a low cost single-payer catastrophic plan provided by the government, with employers funding the HSA and employees funding the FSA. Of course, this level of convenience takes some of the impetus away from cost savings, however as health care is not a normal good that responds to market pressures, this is probably a good thing.

People will obtain health care upon doctor recommendations, regardless of their ability to pay. Providers will then shoulder the burden of waiting for health savings account balances to accumulate – further encouraging provider consolidation. Existing trends toward provider consolidation will exacerbate these problems, because patients will lack options once they are in a network, giving funders little option other than paying up as demanded.

Shifting to more public funding of health care in response to future events is neither good nor bad. Rather, the success of such funding depends upon its adequacy and its impact on the quality of care – with inadequate funding and quality being related. For example, Medicare provider cuts under current law have been suspended for over a decade, the consequence of which is adequate care. By way of comparison, Medicaid provider cuts have been strictly enforced, which has caused most providers to no longer see Medicaid patients, driving them to hospital emergency rooms and free clinics with long waiting periods to get care.

Ultimately, fixing health care reform will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding). We will now move to an analysis of funding options and their impact on patient care and cost control.

The committee well understands the ins and outs of increasing the payroll tax, so I will confine my remarks to a fuller explanation of Net Business Receipts Taxes (NBRT). Its base is similar to a Value Added Tax (VAT), but not identical.

Unlike a VAT, an NBRT would not be visible on receipts and should not be zero rated at the border – nor should it be applied to imports. While both collect from consumers, the unit of analysis for the NBRT should be the business rather than the transaction. As such, its application should be universal – covering both public companies who currently file business income taxes and private companies who currently file their business expenses on individual returns.

The key difference between the two taxes is that the NBRT should be the vehicle for distributing tax benefits for families, particularly the Child Tax Credit, the Dependent Care Credit and the Health Insurance Exclusion, as well as any recently enacted credits or subsidies under the ACA. In the event the ACA is reformed, any additional subsidies or taxes should be taken against this tax (to pay for a public option or provide for catastrophic care and Health Savings Accounts and/or Flexible Spending Accounts).

This option would be particularly attractive to small businesses. It would essentially broaden the tax credit in the ACA. The current tax regime does not serve to encourage use of the Small Business Tax Credit, which in any case should be merged with the health insurance exclusion as part of an NBRT collected on all businesses, regardless of filing status.

The key to utilization is to increase the tax rate enough to encourage use and requiring such tax benefits for health care and our proposed expanded and refundable Child Tax Credit before any other exclusion are taken, including any zero rating of exports (which is why zero rating is not recommended for this tax).

The NBRT can provide an incentive for cost savings if we allow employers to offer services privately to both employees and retirees in exchange for a substantial tax benefit, either by providing insurance or hiring health care workers directly and building their own facilities, although we expect that only larger businesses will go to those lengths. Employers who fund catastrophic care or operate nursing care facilities would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but no so much that the free market is destroyed.
This proposal is probably the most promising way to arrest health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.
The NBRT would replace disability insurance, hospital insurance, the corporate income tax, business income taxation through the personal income tax and the mid range of personal income tax collection, effectively lowering personal income taxes by 25% in most brackets.
Note that collection of this tax would lead to a reduction of gross wages, but not necessarily net wages – although larger families would receive a large wage bump, while wealthier families and childless families would likely receive a somewhat lower net wage due to loss of some tax subsidies and because reductions in income to make up for an increased tax benefit for families will likely be skewed to higher incomes. For this reason, a higher minimum wage is necessary so that lower wage workers are compensated with more than just their child tax benefits.

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.

Hearing on Moving from Unemployment Checks to Paychecks: Implementing Recent Reforms

Comments for the Record

House Ways and Means Committee

Subcommittee on Oversight

Hearing on Moving from Unemployment Checks to Paychecks: Implementing Recent Reforms

Wednesday, April 25, 2012, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

Chairman Davis and Ranking Member Doggett, thank you for the opportunity to submit comments on these issues. I will leave oversight details to the scheduled witnesses and comment on why benefits should be extended. The ironic fact is that, because the Center for Fiscal Equity does not benefit any particular industry, it is unfunded. Our ability to comment on these and other hearings in the past several months is only possible due to my ability to draw Unemployment Insurance. I have been working very hard, but without pay.

There are those on the conservative side of the intelligentsia who will likely offer the opinion that Unemployment Insurance allows people to avoid going back to paid work and that continuing to extend benefits simply delays the day when they must seriously look for the first available job.

These are answered by advocates for continuing to pay benefits, who defend the freedom the program offers to not seek the first available job, so that workers are more likely to find a job that is a match to their skill sets. Additionally, when more qualified workers can be more selective, less qualified workers are able to take the lesser skilled jobs that others are able to take a pass on because they can survive on benefits. I tend to agree with this analysis.

Most economists will also point out that payment of benefits allows those laid off to continue to spend at least some money, stopping a bad economy from getting much worse – especially when there are no jobs to be had by anyone, skilled or unskilled. This is likely the case with the current economy, at least until recently.

An issue undoubtedly facing this committee is the funding of extended unemployment benefits, as well as the possibility of benefits to the 99ers who do not qualify for extended aid and must now rely on family members, the ability to retire early or other social welfare benefits, such as the Supplemental Nutrition Assistance Program, which serves as the aid of last resort. Sadly, in an effort to give welfare reform teeth, SNAP levels are way below what is required for an individual to eat for a month.

Traditionally, extended benefits were financed without offsets. This is entirely appropriate, because UI is funded by a separate tax and raising this tax generally during an economic downturn would likely make the downturn worse. Cuts to items outside the UI trust fund are thus inappropriate and should not be suggested or required in our opinion. If funding cannot be debt financed, it must come from some kind of revenue increase. It is disappointing that the defenders of the program in Congress have not, to date, made this point and called their bluff.

It is troubling that while many families are still struggling under joblessness, uncertainty as to their job security or prospect for higher incomes and in many cases mortgages that are greater than their homes are worth, many of our largest companies are flush with cash and are quite unwilling to take the risk of “paying forward” the recovery by hiring more staff or giving existing staff substantial wage increases. What is even more troubling is that it is likely that many of these firms have these record cash accumulations as the result of austerity measures. While some firms most likely conducted layoffs in order to simply survive, others did so to maintain or increase profitability through cutbacks, outsourcing or automation – or simply limiting wage increases. Shareholders and executives are often rewarded for these actions, even though such actions on the whole damage potential revenue by limiting the customer base.

Henry Ford increased the wages of his workforce so that they could afford his car and was rewarded with profitability. If more firms were as smart as Mr. Ford, we would be out of this time of austerity.

The Government is not without options in this regard and now is the time to employ one of them. While companies that were struggling to get by, or who have closed, cannot afford to pay an unemployment surtax to fund their employees who require extended unemployment, there are those companies who certainly can. Therefore, in order to fund the next round of extended unemployment benefits, such a surtax should be levied and it should be high enough to cover not only those employees who have been laid off from that firm, they should be high enough to cover all such beneficiaries. Enacting such a levy will provide companies who are sitting on large cash balances with a strong incentive to rehire staff, so Unemployment Insurance really would be the way back to work.

The secondary effects of this are also significant. Newly rehired workers will spend more while those who have not been rehired will at least be able to maintain current spending. In both cases, the economy will be stimulated enough so that many firms that were struggling will have higher sales, as well as those firms which rehired former employees to avoid the higher tax. This virtuous cycle will continue to accelerate until the economy has righted itself.

There are those who would criticize this proposal as penalizing the profitable. They have no leg to stand on when these profits came at the cost of human suffering. Anyone who makes such an argument should be ashamed of themselves and deserve public scorn.

Does that mean reform is impossible? Of course not. The Center for Fiscal Equity proposes a tax reform solution with four major provisions, including a Value Added Tax, personal income surtaxes on the wealthiest families (to ensure period progressivity), employee contributions to Social Security and a VAT-like Net Business Receipts Tax (NBRT).

Of most concern to these proceedings is the NBRT, as it will include credits for an enhanced refundable Child Tax Credit to be paid to both workers and participants in adult education, unemployment insurance and other social welfare programs, all of which will be performed by both government, employers and the private sector (with or without government case management).

The NBRT is essentially a subtraction VAT with additional tax expenditures for family support, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

The NBRT will fund services to families, including Unemployment Insurance, education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, Medicare and Medicaid. If society acts compassionately to prisoners and shifts from punishment to treatment for mentally ill and addicted offenders, funding for these services would be from the NBRT rather than the VAT.

The NBRT could also be used to shift governmental spending from public agencies to private providers without any involvement by the government – especially if the several states adopted an identical tax structure. Either employers as donors or workers as recipients could designate that revenues that would otherwise be collected for public purposes.

Unemployment Insurance could be run like a severance pay arrangement, but with continued payments and remedial training administered by the former company in lieu of paying the NBRT (or even for a refundable credit). Beneficiaries would continue to receive the Child Tax Credit and insurance, either from their former company, the government or any training provider offering them retraining or basic education that they missed in the past.

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.

Senate Finance Committee: Tax Reform: What It Means for State and Local Tax and Fiscal Policy

Chairman Baucus and Ranking Member Hatch, thank you for the opportunity to submit these comments for the record to the Senate Finance Committee.  As always, our comments are in the context of our four part tax reform plan:

·         A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.

·        Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments.  Heirs would also pay taxes on distributions from estates, but not the assets themselves, with distributions from sales to a qualified ESOP continuing to be exempt.

·        Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.

·        A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

Our proposals have several impacts on state and local tax and fiscal policy.  Those states with fixed conformity provisions regarding income taxation in law or their constitutions will be greatly affected by enactment of a simplified income tax which treats distributions from inheritance as normal income.  Indeed, if they do not enact similar reform, which includes a much higher income floor for filing, many more heirs will be touched by this provision than in federal law.  As most state income tax rate structures are much less progressive than the federal system, many states will be able to abandon income taxation altogether, possibly increasing use of Land Value Taxes if some form of redistributive tax is still desired.

If the basic structure of reform is adopted in the states, the biggest change will be the need for a common base between federal and state consumption taxes.  Shifting from retail sales taxes and gross receipts taxes to value added taxes and VAT-like net business receipts taxes will change the nature of most state taxation, while enabling ease of collection of taxes on online sales, since taxes would be levied at every stage of the production process.  

If a common base agreement can be negotiated for these taxes, state treasurers can collect both their own taxes and the federal taxes, as well as analytical information on tax credit usage, which can then be shared with the U.S. Internal Revenue Service in order to track income accruing to payers of the federal high income surtax, as well as to recipients of the federal child tax credit, which would be paid to employees with wages under the NBRT and then verified by a mailing from both the employer and the Internal Revenue Service, with employees verifying that their employees paid every dollar to them reported as a credit.

Our hope is that states would match the Child Tax Credit at a level consistent with their cost of living.  Some states might even include higher credits for certain high-cost counties, for instance, Northern Virginia.

The NBRT at both the state and federal levels should fund services to families, including education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, Medicare and Medicaid. If society acts compassionately to prisoners and shifts from punishment to treatment for mentally ill and addicted offenders, funding for these services would be from the NBRT rather than the VAT.

States may also include several of the educational and social service credits recommended under our proposal.  The NBRT could be used to shift governmental spending from public agencies to private providers without any involvement by the government – especially if the several states adopted an identical tax structure. Either employers as donors or workers as recipients could designate that revenues that would otherwise be collected for public schools would instead fund the public or private school of their choice. Private mental health providers could be preferred on the same basis over public mental health institutions. This is a feature that is impossible with the FairTax or a VAT alone.

To extract health care cost savings under the NBRT, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit, provided that services are at least as generous as the current programs. Employers who fund catastrophic care would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid. Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but not so much that the free market is destroyed.  Increasing Part B and Part D premiums also makes it more likely that an employer-based system will be supported by retirees.

Enacting the NBRT is probably the most promising way to decrease health care costs from their current upward spiral – as employers who would be financially responsible for this care through taxes would have a real incentive to limit spending in a way that individual taxpayers simply do not have the means or incentive to exercise. While not all employers would participate, those who do would dramatically alter the market. In addition, a kind of beneficiary exchange could be established so that participating employers might trade credits for the funding of former employees who retired elsewhere, so that no one must pay unduly for the medical costs of workers who spent the majority of their careers in the service of other employers.

Conceivably, NBRT offsets could exceed revenue. In this case, employers would receive a VAT credit.

There will be no impact on the states of FICA reforms, except to the extent that our suggested reforms yield a higher base benefit for seniors, which will decrease their need for state social service benefits.

Income tax simplification will eliminate the deduction for state income and property taxes.  The extent to which state income taxes are eliminated will also eliminate the demand for these, although if states adopt higher land value taxes for redistributive purposes, some residual deduction for this tax may need to be included in the federal tax code, although doing so will simply require higher federal rates to make up the difference.  Additionally, abandonment of the state income tax deduction has been seen as a reason to entirely federalize Medicaid as an offset.  Doing so may be appropriate, however if participants in subsidized and paid adult education are covered by the provider’s insurance as if employees and retirees long term care needs are increasingly covered by the firms they retired from as an offset to Net Business Receipts Taxes, the question of funding Medicaid may be a minor footnote.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.

Hearing on the Use of Technology to Better Target Benefits and Eliminate Waste, Fraud, and Abuse

Comments for the Record

House Ways and Means Committee

Subcommittee on Human Resources

Hearing on the Use of Technology to Better Target Benefits  and Eliminate Waste, Fraud, and Abuse

Thursday, April 19, 2012, 10:00 AM

By Michael G. Bindner Center for Fiscal Equity

Chairman Davis and Ranking Member Doggett, thank you for the opportunity to submit comments on these issues. We will leave it to others to comment on the actual execution of data standardization goals and will instead focus on ways in which data standardization and welfare reform would be impacted by our tax and entitlement reform proposals. The Center for Fiscal Equity proposes a large ball solution with four major provisions, including a Value Added Tax, personal income surtaxes on the wealthiest families (to ensure period progressivity), employee contributions to Social Security and a VAT-like Net Business Receipts Tax (NBRT).

Of most concern to these proceedings is the NBRT, as it will include credits for an enhanced refundable Child Tax Credit to be paid to both workers and participants in adult education, unemployment insurance and other social welfare programs, all of which will be performed by both government, employers and the private sector (with or without government case management).

The NBRT is essentially a subtraction VAT with additional tax expenditures for family support, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

The NBRT will fund services to families, including education at all levels, mental health care, disability benefits, Temporary Aid to Needy Families, Supplemental Nutrition Assistance, Medicare and Medicaid. If society acts compassionately to prisoners and shifts from punishment to treatment for mentally ill and addicted offenders, funding for these services would be from the NBRT rather than the VAT.

The expansion of the Child Tax Credit is what makes tax reform worthwhile. Adding it to the employer levy rather than retaining it under personal income taxes saves families the cost of going to a tax preparer to fully take advantage of the credit and allows the credit to be distributed throughout the year with payroll.

The only tax reconciliation required would be for the employer to send each beneficiary a statement of how much tax was paid, which would be shared with the government. The government would then transmit this information to each recipient family with the instruction to notify the IRS if their employer short-changes them. This also helps prevent payments to non-existent payees. Current data standardization efforts will assist this reform.

The NBRT could also be used to shift governmental spending from public agencies to private providers without any involvement by the government – especially if the several states adopted an identical tax structure. Either employers as donors or workers as recipients could designate that revenues that would otherwise be collected for public schools would instead fund the public or private school of their choice. Private mental health providers could be preferred on the same basis over public mental health institutions. This is a feature that is impossible with the FairTax or a VAT alone.

Literacy training for both parents should replace TANF, ending the need for such a large child welfare bureaucracy. The restriction on benefits to intact families must be abolished. Furthermore, compensation for this training should be as rewarding as work, so participation should be compensated at the minimum wage.

In addition to the wage, participants should also receive the same Child Tax Credit as those who work, as well as the same level of health insurance, which could be offered to them as if they were employees of the education provider – thus ending the second class care they receive through the Medicaid program, as well as the need to pay benefits through large, yet underfunded, social welfare bureaucracies at the state level. Public housing should be replaced with residential training programs for both parents and children. Keeping case management with the training provider also lessens the likelihood of fraud because of multiple data systems.

Shifting from publicly funded services to private ones, sometimes without any governmental case management or contracting (beyond assuring accreditation) makes standardization both more and less important – as there may well come a day when there is no governmental performance of these services, making the question moot in the public sector. Should this occur, any standards would be industry based ANSI standards rather than governmental.

The extent to which services are provided by employers and public charities with funding by business taxpayers is the extent to which waste, fraud and abuse is lessened – especially if benefits are tied to a training requirement. Indeed, if Unemployment Insurance is run like a severance pay arrangement, but with continued payments and remedial training administered by the former company in lieu of paying the NBRT (or even for a refundable credit), the likelihood of fraud is decreased as former employers are more likely to pay attention to whether employees are ripping them off by both working and collecting benefits. If the firing company also provides paid training experiences to former employees, there is less likelihood of fraud as well.

Thank you again for the opportunity to present our comments. We are always available to members, staff and the general public to discuss these issues.

Hearing on Tax Reform and Tax-Favored Retirement Accounts

Comments for the Record

U.S. House of Representatives

Committee on Ways and Means

Hearing on Tax Reform and Tax-Favored Retirement Accounts

Wednesday, April 17, 2012, 10:00 AM

By Michael G. Bindner

Center for Fiscal Equity

 

Chairman Camp and Ranking Member Levin, thank you for the opportunity to submit these comments for the record to the House Ways and Means Committee. Our comments are an expansion of last month’s comments and are, as always, in the context of our tax reform plan, which has the following four elements:

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure every American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25% in either 5% or 10% increments. Heirs would also pay taxes on distributions from estates, but not the assets themselves.
• Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support, personal retirement accounts, health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

Under our proposal, tax deferred accounts will no longer be needed. Returns on investment and savings will be tax free until spent for the vast majority of households. Households who do pay the income and inheritance surtax will need no incentive to save (they already do) and none should be granted to them in the tax code. More importantly for reform is the question of the transition from the current patchwork system of tax deferred and pre-taxed retirement accounts to a system without them.

Some VAT proponents take the position that if the tax replaces taxes paid by employees and shareholders, introduction of a VAT will be price neutral while others contend that it will result in an increase to price levels whenever the rate in increased and upon introduction. As many VAT adoptions occurred in Europe during times of high inflation, the matter is eminently debatable.

Our detailed proposal to the Fiscal Commission in 2010 assumed that there would be a one-time price increase of some level and that during the transition, net pay would be allowed to rise for most wage earners by the same rate as the VAT by adjusting tax withholding tables by that amount. If prices did not increase by the same percentage, this would be a one-time bonus for most workers and an inducement to either save or to increase consumption. Other analysts are also of the view that the perception that VAT introduction will raise prices in the future will result in immediate spending in the period just before introduction. In either scenario, VAT introduction may just kick-start the economy.

An argument against VAT introduction is that it would impose additional taxes on Social Security recipients and individuals who have already invested in Roth Individual Retirement Accounts with funds that have already been taxed.

In order to hold Social Security beneficiaries harmless, there should be a one-time Cost of Living Allowance increase by the same percentage as the tax, as well as an additional increase whenever the VAT rate increases. Additional increases to the base benefit would result to offset any increases to Medicare Part B and Part D premiums. Both of these would be paid for by our proposal to shift the employer contribution from an income capped payroll tax to an uncapped Net Business Receipts Tax.

Roth holders would get a one-time tax rebate on their income taxes equal to the VAT rate based on their account size. Assuming a 10% VAT and a Roth IRA of $100,000, the rebate would be $10,000. This rebate could be paid out over a period of years, as most accounts have been accumulated in that fashion. Holders of tax deferred accounts would obviously need no rebate and would simply pay consumption and income taxes upon withdrawal, with income taxes due only if the additional income pushes total income above the income tax floor.

No adjustment to incomes for workers or retirees will be made to offset the NBRT, as this tax is replacing a variety of taxes including payroll taxes for disability insurance, unemployment insurance, hospital insurance, survivors insurance for non-retirees, the employer contribution to old age and older survivors insurance, the corporate income tax, business taxes collected through the personal income tax system and a portion of personal income taxes. Transition to this tax will reduce gross income, but not necessarily net income. Additionally, some families will receive an increase of income due to the introduction of an expanded refundable child tax credit, while others may experience a salary decrease if they have a smaller family size as base wages are reduced within companies to account for the expansion of this credit.

Thank you for the opportunity to address the committee. We are, of course, available for direct testimony or to answer questions by members and staff.