Hearing on Tax Reform and Tax Provisions Affecting State and Local Governments

Comments for the Record

U.S. House of Representatives

Committee on Ways and Means

Hearing on Tax Reform and Tax Provisions Affecting State and Local Governments

Tuesday, March 19, 2013, 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 Committee on Ways and Means. They are substantially similar to our comments in April of last year to the Senate Finance Committee. Feel free to contact us for a more in depth briefing on our testimony for either members or staff. 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.

MPAC’s March Report to Congress

Comments for the Record

U.S. House of Representatives

Committee on Ways and Means

Subcommittee on Health

Hearing on MPAC’s March Report to Congress

March 15, 2013, 9:30 AM

by Michael G. Bindner

The Center for Fiscal Equity

Chairman Brady and Ranking Member McDermott, thank you for the opportunity to submit my comments on this topic.  As there has been turn-over in the membership of the committee, we will largely repeat our comments from last year, which provide real alternatives to current policy, as well as current problems that no one is talking about relating to the implementation of the Affordable Care Act.  We are always available to brief members and staff individually on our comments or respond to any questions.

It is always important to note that 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.

Recent history shows what happens when benefit levels are cut too drastically.  Prior to the passage of Medicare Part D, provider cuts did take place in Medicare Advantage (as they have recently).  Utilization went down until the act made providers whole and went a bit too far the other way by adding bonuses (which were reversed in the Affordable Care Act).  There is a middle ground and the Subcommittee’s job is to find it.

Resorting to premium support, along with the repeal of the ACA, have been suggested to save costs.  Without the ACA pre-existing condition reforms, mandates and insurance exchanges, however, premium support will not work because people will have no assurance of affordable coverage.  This, of course, assumes that private insurance survives the imposition of pre-existing condition reforms.  We do not have to wait until implementation to examine this question.  Now that the Supreme Court has spoken, the stock market will examine it for us.  There may well be a demand for reform before the election if the prospects for private insurance are found wanting.  Conversely, if stock prices are maintained, it is the market expecting mandates to be adequate.

Assuming mandates are seen as inadequate, the questions of both premium support and the adequacy of provider payments are moot, since if private insurance fails the only alternatives are single-payer insurance and a pre-emptive repeal of mandates and protections in favor of a subsidized public option.  The funding of either single-payer or a public option subsidy will dwarf the requirement to fund adequate provider payments in Medicare and Medicaid.

Resorting to 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.

The question of Accountable Care Organizations and cost sharing with payments is also relevant.  The Senate Finance Committee addressed this question last year.  Hearing witnesses focused on Accountable Care Organizations and other possible solutions to bend the cost curve.  This emphasis is all well and good of most beneficiaries of Medicare, Medicaid and other forms of directly and indirectly subsidized insurance in most years.  Focusing on results is a worthy goal for both patient well being and cost control, provided the patient can be treated.  Medicare, however, devotes significant resources to the expensive care found in the last year of life, which may involve multiple hospitalizations, full time nursing services through Medicaid or a period of intensive care which ultimately proves unsuccessful.  In all of these circumstances, particularly the last, unless we are willing to either have doctors deny care or force survivors to pay bills that the government refuses to pay, some form of fee for service is necessary.

In April of 1998, our Principal’s father, Jim Bindner, had a heart attack, due in part to either an undetected acute episode of diverticulitis (which was not detected until autopsy) and in part to a lack of oxygen resulting from successful radiation treatment for metastatic lung cancer.  Had this attack occurred today, there is a chance that advances in emergency medicine, including cooling of the patient, might have resulted in a successful outcome.  This strategy, however, did not exist in 1998 and is still not widely practiced.  As a result, resuscitation was incomplete and Mr. Bindner was left in a coma in intensive care for almost a week before he passed.

The relevant question is, what would a results based medicine scenario pay for in situations such as this?  Would the government have forced Mercy Medical Center to simply eat the costs?  If so, would there have been pressure from the hospital to end care sooner?  Would the alternative have been a copayment for these services for the family?  

Worse yet, would someone have forced the choice on Mrs. Bindner to either agree to payment or discontinue life support earlier to save cost?  These are the questions that such modalities as results based payment bring forward loud and clear and they will hit every family with children of a certain age.  This is not the specter of the death panel.  It is something much worse – a demand to agree to pay or make a tragic decision at the most difficult time in anyone’s life.

Tragically, Mrs. Bindner followed her husband in death last year one month after our last comments.  We were not faced with a decision to disconnect before we were ready, although we did withdraw support and allow her to die in peace once it was confirmed there was no brain function.  If it had been the choice of some insurance bureaucrat rather than our choice, a tragic situation would have been made worse.

While some families could, of course, afford to pay for greater end of life services, the prospect that money might by longer life, or a greater chance for miraculous recovery to occur, would turn such care from what is now a right to a commodity.  The Center finds this unacceptable.

In fee for service medicine, this choice is simply not required.  Certainly the richest society on the planet can afford to allow women facing imminent widowhood to avoid such heart breaking choices if possible.  Recent reforms have essentially turned the Medicare Part A Payroll Tax into a virtual consumption tax already by taxing non-wage income above $250,000 a year.  It would be as easy to shift from a payroll tax to a value added or VAT-like net business receipts tax (which allows for offsets for employer provided care or insurance) and would likely raise essentially the same amount of money, as most non-wage income actually goes to individuals now liable for increased taxes.  If a VAT system is used, tax rates can be made lower because overseas labor will essentially be taxed, leaving more income for American workers while raising adequate revenue.

Premium support systems would not have any impact at all on end of life care decisions, except to the extent that they lead to cost cutting and the kind of choices mentioned above that we can all hopefully agree are abhorrent.  Ultimately, this negates much of the cost savings that could come from premium support, so this idea should be dropped.

A single-payer catastrophic plan would guarantee payment by the widow of any difference between the catastrophic deductible and the accumulated health savings account.  This, again, is the last thing any widow should have to face, even if the survivors have adequate insurance.

Replacing payroll taxes with Value Added Tax (VAT) funding will have no impact on whether fee for service medicine at the end of life continues, except for the fact that more adequate funding makes the need to save costs less urgent. 

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.

One form of increased funding could very well be higher Part B and Part D premiums.  This has been suggested by both the Fiscal Commission and the Bipartisan Policy Center.  In order to accomplish this, however, a higher base premium in Social Security would be necessary.  Our proposal is that to do this, the employee income cap on contributions should actually be lowered to decrease the entitlement for richer retirees while the employer income cap is eliminated, the employer and employee payroll taxes are decoupled and the employer contribution credited equally to each employee at some average which takes in all income.  If a payroll tax is abandoned in favor of some kind of consumption tax, all income, both wage and non-wage, would be taxed and the tax rate may actually be lowered.

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), regardless of whether Part B and D premiums are adjusted.  If the same consumption tax pays both retirement income and government health plans, the impact on the taxpayer is exactly nil in the long term.  

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 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.

Adoption of the NBRT does offer some interesting questions to the extent that offsets are allowed.  This shifts the ethical locus from the government to employers, although the government would, of course, require superior coverage to use any offsets.  Still, the decision-makers on the ground would not be someone at CMMS, but someone in the corporate benefits office.  While the practice of buying life insurance for employees with the firm as beneficiary certainly mitigates the cost, it might also appear ethically problematic if the payout encourages the disconnection of support earlier than the family finds comfortable.

The form of the employer’s company providing care in lieu of tax payment matters in this case.  A firm with outside shareholders, even if it is a model of compassion, will always be looked upon as potentially untrustworthy in allocating end of life care, especially given their greater incentive to do so to minimize costs which would otherwise go to profit.  Employee-owned firms, however, might be regarded as more trustworthy making these decisions, since employees would be responsible to each other rather than to outside owners for cost minimization.  We believe such firms are less likely to force hard end of life choices on widows, at least for financial considerations.

As we have stated previously, shifting the Old Age, Survivors and Disability Insurance Employer Payroll Tax to a VAT-like Net Business Receipts Tax can facilitate the accumulation of employee-owned shares, especially if a faster transition which includes current retirees, who must be made whole (with some of these transition funds being provided by the U.S. Treasury from the OASI Trust Fund), will result in a lower NBRT levy immediately and in the future.  Converting retained equity to employee-ownership may give some firms the opportunity to transition far quicker than any other plan envisions.

These proposals can solve the problem of rural health care as well.  Provided employers don’t relocate (and more employee-ownership makes this less likely), the infrastructure which provided health care to workers would continue to exist for retirees.  Employee-owned firms might also take on sponsoring the training of doctors with the condition that they locate in rural areas where they operate and have retirees.

In a single payer or public option system, incentives can be paid to doctors who move to rural areas.  Of course, if we simply expanded the Uniformed Public Health Service to a British style National Health System, there is no issue of where doctors want to practice, they would simply be assigned to the areas where they were needed.

Currently, much in the way of rural health care comes from members of the Catholic Health Association.  In our previous example, end of life care was provided in such a hospital in a rural area.  As long as these hospitals continue to exist, there will be some base of health care in rural areas – provided we as a nation do not take advantage of their charity by cutting provider rates with the expectation that they will always be a low cost provider or raise money to pick up the slack.  The Sisters who own and run these hospitals have a retirement income crisis of their own, so deliberately underpaying them is not a good long term strategy for assuring rural health care exists in the long term.

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.

Securing the Future of the Social Security Disability Insurance Program

Comments for the Record

House Ways and Means Committee

Subcommittee on Social Security

Hearing on Securing the Future of the Social Security Disability Insurance Program

Thursday, March 14, 2013, 10:00 A.M.

by Michael Bindner

The Center for Fiscal Equity

  

Chairman Johnson and Ranking Member Becerra, thank you for the opportunity to submit our comments on this topic. These are our fourth comments on this issue, which will focus on the funding shortfall and our proposal to deal with it. The previous comments were made to December 2, 2011, the second to December 9, 2011 and the third to September 14, 2012. As always, we are available to individually brief members and staff about our proposals.

  

On the demand side, people have entered disability due to detrimental changes in the welfare program, where states shuttled hard cases into Disability from TANF. If Congress wishes to reverse this, it must make TANF less punitive and turn it into a ladder to develop able minds rather than able bodies.

Congress can also enact a refundable expanded Child Tax Credit of $500 per month per child for all workers and TANF/Disability/UI beneficiaries, as well as encouraging longevity payment with employer stock and dividends, so that the incentive to fire workers that could be productive goes away and the incentive to have them claim disability reduces.

Waiting limits can be eliminated entirely, which saves money on legal fees. The initial award can be made in cooperation with the last employer, who would provide at least a portion of disability income as well as rehabilitative training in lieu of a higher disability insurance tax payment. Such a system would bring about faster determinations of disability, without the need to provide a case management and appeal infrastructure which provides make-work for both bureaucrats and disability lawyers, both of which add no real value to the program while costing taxpayers more and more as backlogs continue to grow and cases are summarily denied on the first reading.

As stated, our proposed solutions are made in the context of a four part tax reform, which form the basis of our analysis. The key elements are:

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure that every American family 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.

In summary, our solution is to shift funding for disability insurance and rehabilitation entirely to an employer-paid, VAT-like Net Business Receipts Tax, with the payment of disability benefits and rehabilitative care to be covered by either the last employer or a future employer who wishes to take on the new employee’s “case” and provide both continued benefits and services until that worker can be productive without continued assistance.

The separate disability payroll tax will be repealed. Repealing this tax provides a justification for decoupling the benefit level from past income. An income based benefit should be replaced with a standard benefit. During the application phase, instead of forcing participants onto state welfare rolls, the last employer would pay the standard benefit – which should be at least the minimum wage for a full time worker, if not higher – with this payment offsetting the employers NBRT liability and, if necessary, its VAT collections.

If the employee has dependent children, each child will also receive the refundable expanded Child Tax Credit with their benefits (currently estimated at $50o per child per month). Please note that we propose elsewhere that the minimum wage be increased to $12 an hour so that no one is paid primarily through the Child Tax Credit and that both the minimum wage and the credit be automatically adjusted for inflation.

As stated elsewhere, the expansion of the credit is funded by consolidating it with the Earned Income Tax Credit, the deduction for children and limitations on or elimination of the mortgage interest and property tax deductions. The extension of this credit to non-workers is offset by abolishing supplemental retirement programs, such as Supplemental Nutrition Assistance and housing assistance.

Once the application process is complete, the Federal (or regional) government will distribute payments, as well as the expanded refundable Child Tax Credit for any dependent children, all of whom would qualify for Medicare, including any long term care provisions transferred to the federal government from the Medicaid program.

If vocational or educational training is required, as it likely should be in some cases, then the training provider will serve as both “case worker” and conduit for additional benefits, including the Child Tax Credit. Participants would be paid the minimum wage for engaging in training, along with any additional stipend provided to program beneficiaries of the benefit level were set higher.

Client health care would be funded by the federal government, but could conceivably be provided through the health care system provided to employees of the training provider. This is also our proposal for providing education to TANF beneficiaries. This care could take the form of health insurance or of staff medical personnel and facilities. In the event health care reform devolves into a public option or single payer system, the question of who pays for health care will be moot.

Clients who are incapable of completing training and finding employment will be transferred back to beneficiary status, with the training provider paying benefits during any transition period.

Program participants, like TANF participants, would not pay OASI payroll taxes, nor would program providers pay an employer contribution on their behalf or distribute any personal retirement account shares to them as an offset to their Net Business receipts taxes.

Unless they have significant outside income from an inheritance, tort judgment or lottery prize, it is doubtful that program participants will be hit with the Income and Inheritance Surtax. In any case, benefits and tax credits received would not be counted in determining adjusted gross income for this tax, although training stipends probably should be.

Program participation should not be means tested based on any judgment, although beneficiaries of significant inheritances should probably be excluded from the program, although that level should be set rather high – likely at the level where such benefits are taxed, currently proposed at $50,000 for individuals and $100,000 for joint filers and qualifying widow(er)s.

While these program efficiencies will likely save money on administrative costs, they will not cure the demographic problem entirely. Some increases in revenue, in this case, the Net Business Receipts Tax may indeed be required periodically under the logic of social insurance.

As stated previously, the logic of social insurance is to spread out benefits and harms from unearned demographic factors. Some people come from large families or rich families who can cushion the blow for a disabled child or sibling will have no problem making up for program short-comings. Those who have no family or whose illnesses have estranged them from their families would experience unearned hardship.

Resorting to increased public funding to adequately fund the program in current years by adjusting the NBRT should happen without controversy – especially given the incentives to minimize costs inherent in allowing employers a role in the determination and rehabilitative process. One could even imagine leaving the setting of the NBRT rate to a formula based on the needs of the various programs it funds and the extent to which employers utilize alternatives. Indeed, a high NBRT rate might lead to zero collections if it spurs employer action to improve services to employees.

Thank you for this opportunity to share these ideas with the subcommittee. We are always available to discuss them further with members, staff and the general public.

Tax Ramifications of the President’s Health Care Law

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Subcommittee on Health

Hearing on the Tax Ramifications of the President’s Health Care Law

Tuesday, March 5, 2013, 11:00 AM

by Michael G. Bindner

The Center for Fiscal Equity

Chairman Boustany and Ranking Member McDermott, thank you for the opportunity to submit my comments on this topic. We must note that because the law is actually part of the U.S. Code, it is time to quit identifying it only with the President. It was used as an election issue in 2012 and the results speak for themselves. It is now time to tone down the rhetoric, especially given the electoral composition of the Senate and the resistance by both parties to end the filibuster.

The main issue remaining from last year’s Supreme Court ruling is the expansion of Medicaid rolls and the opposition in some states to doing so. While that has seemed to be just posturing in some states, it may lead to the need to federalize the entire Medicaid program, which might occur as part of a comprehensive tax reform, such as the one suggested by the Center.

We believed at the time that opposition to the Law had nothing to do with mandates, the Commerce Clause or Medicaid funding. The real reason conservative major donors don't like the law is the funding mechanism for much of reform. These donors were ot successful in court or at the ballot box, so the American Taxpayer Relief Act of 2012 went into full force without stopping those provisions of the Affordable Care Act they objected to. These donors were writing checks because of provisions creating additional taxes on un-earned income that fix Medicare Part A funding and fund other health care reform, essentially turning the Hospital Insurance Tax into a Value Added Tax with an exemption on profits paid to the 98%. Fighting for repeal on this basis, however, would only be politically unpopular.

There is now no reason to repeal the ACA unless the new funding on high income earners is replaced by a broader consumption tax. As we stated in March:

Note that whenever this tax applies to those whose holding operate in less than a perfectly competitive market, in other words to most commerce in 21st century America, the costs will likely be passed to the consumer and it would be more honest to simply enact a Value Added Tax or VAT-like Net Business Receipts Tax (which is proposed below).

Our prior testimony on the adequacy of mandates is as applicable now as it was in March, if not more so. We believe that the stock market priced in repeal and may react negatively to the prospect of guaranteed issue and community rating. The Committee ignores these predictions at their own peril. These impacts, which are outside the scope of the testimony of government witnesses, will likely negate many of the new provisions of the ACA. As we stated previously:

We will now return to the question of the adequacy of mandates. 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. 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, as proposed by Chairman Ryan, 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.

Resorting to single-payer catastrophic insurance with health savings accounts (another Republican proposal) 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.

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 (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).

If cost savings under an NBRT, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit. 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 no so much that the free market is destroyed. The ability to exercise market power, with a requirement that services provided in lieu of public services be superior, will improve the quality of patient care.

This proposal 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.

Employer provided health care will also reverse the trend toward market consolidation among providers. The extent to which firms hire doctors as staff and seek provider relationships with providers of hospital and specialty care is the extent to which the forces of consolidation are overcome by buyers with enough market power to insist on alternatives, with better care among the criteria for provider selection.

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.