Taxed if You Do, Taxed if You Don’t

Federal, state and local taxes customarily are due when you choose to do something, such as buy a pack of cigarettes, a gallon of gasoline, a new set of tires, a bottle of liquor or wine, a bracelet or a ring, or take a job and earn income. No tax is due if you choose not to do those things.

Buried in the fine print of the various healthcare reform bills now being considered on Capitol Hill are provisions for taxing people who do not purchase a product President Obama and his allies in Congress plan to insist that you buy, namely, yet-to-be-defined “adequate” health insurance.

Legislation backed by Senate Finance Committee Chairman Max Baucus proposes levying an excise tax on anyone who does not maintain health insurance coverage. Individuals who fail to purchase such policies face fines of up to $980 per year; the penalty could be as high as $3,800 for families. The House version of the bill also calls for “a tax on individuals without acceptable healthcare coverage”.

Demanding that every American either pay or play by the government’s forthcoming healthcare rules is a blunt way of forcing people who would not otherwise do so to buy insurance. Large numbers of the 30 million (or is it 40 million?) individuals now uninsured are young, unmarried and in good health. Not purchasing health insurance is a fairly safe bet for them. But the premiums (or taxes) they will be required to pay are designed to help cover the healthcare costs of people with preexisting conditions to who, if Obamacare is enacted, no insurer, private or public, will be able to deny coverage or even charge actuarially fair premiums. “Adverse selection”, a problem that exists because purchasing insurance is rational only for those who expect their risk-adjusted cost of claims to exceed their premium payments, can quickly bankrupt a private insurer or cause the budget of a public insurance option to go deeply into the red.

But wait! Washington is close to issuing a diktat either that you buy health insurance or pay an excise-tax penalty if you do not. The terms of the coverage you purchase voluntarily cannot be too generous, though, or your insurance company will be subject to another tax. Under the Baucus proposal, if an individual pays more than $8,000 per year in health insurance premiums – or a family pays more than $21,000 – the federal government will levy a 35 percent tax on the policy. That tax will be collected from the insurer, but by the laws of supply and demand, some (perhaps most) of the burden will be passed on to consumers in the form of even higher premiums.

Labor union members and federal government employees are the principal beneficiaries of so-called Cadillac health insurance policies (with General Motors functioning under public ownership, “Lexus policies” possibly is more apt). The 35 percent tax may therefore be doomed politically and have to be made up for with revenue-enhancing increases in other taxes.

It is not news that the public sector’s appetite for taxes is insatiable. But the healthcare reforms now on the table break new ground. Taxing people who choose not to purchase health insurance is not much different from taxing people who do not buy cigarettes. After all, nonsmokers too deny government a potential source of revenue. By the same argument, no personal choices should be left untaxed.

William F. Shughart II is Research Fellow and Senior Fellow at the Independent Institute, the J. Fish Smith Professor in Public Choice at Utah State University, past President of the Southern Economic Association, and editor of the Independent book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.
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