Health Reform: Senate Republicans’ Proposal Is a $47 Billion Tax Hike with Few Beneficiaries

The health-reform proposal put forward by three Republican Senators (Hatch, Burr, and Coburn) has attracted a lot of attention as the so-called Republican alternative to Obamacare.

Although the reform includes a grab bag of previous Republican reforms, including medical malpractice and Medicaid, its most radical element is a significant change to the private, employer-based system. A previous blog entry explained why the Senators’ feel-good “continuous coverage protection” for the privately insured will have negative consequences, and described a superior alternative.

However, an even bigger problem is that the proposal includes a significant tax hike that will harm most working Americans, in return for a tax credit which very few will enjoy.

Some who cheer the proposal gloss over this by noting that its first section repeals Obamacare, which contains about one trillion dollars of tax increases over ten years. By that standard, any Republican bill that repeals Obamacare and replaces it with $999 billion of tax increases over a decade is a winner.

That cannot stand. Beating Obamacare is far too low a bar. Any replacement must do better than what existed before Obamacare. Currently, employer-based health benefits are excluded from households’ taxable income. This is why we get our health benefits from our employers. The Senators’ propose to exclude only 65 percent of the value of health benefits from taxable income.

Even the plans’ critics have underestimated how much this will cost American families. In the New York Times, Dr. Zeke Emanuel wrote that the Senators’ plan would tax 35 percent of the employers’ contribution. On average, employers pay 72 percent of premium directly ($11,786 of $16,351 for a family of four). So, Dr. Emanuel figures that $4,125 would be added to taxable income. But the Senators’ proposal describes taxing 35 percent of the entire benefit, not just employers’ share. So, $5,773 would actually be added to the taxable income of a family of four.

How much would this raise? My analysis of Congressional Budget Office and Joint Committee on Taxation studies of the tax exclusion of employer-based benefits suggest that this would have raised $47 billion in 2013. (And that is just income tax. The taxable income would also be hit with FICA taxes.) My analysis also indicates that this tax hit would reach deep into households of modest income: Just a little over $30,000.

Although a big tax hike, $47 billion does not go very far if used to extend health coverage. One model for universal coverage would give everyone a tax credit of $2,500 for qualifying health insurance. If the entire $47 billion were allocated this way, it would cover fewer than 19 million people.

The Senators’ proposal does offer a tax credit, but to very few people. First, it is available only to those who earn less than 300 percent of the Federal Poverty Level. Second, it is available only to those who work for firms with 100 or fewer employees. These two conditions really limit the number of beneficiaries.

According to the U.S. Census Bureau, 39 million people worked for such firms in 2011, with an average income of about $38,000. The Senators’ tax credit phases out at an income of about $35,000. So, if thirty million people were eligible, the tax hike could fund an average tax credit of about $1,500 for each of them.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

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