A promise of “20 percent Off!” raises questions. “Off what?” we are moved to ask.
A similar suspicion should attend the newly unveiled Obamacare demolition bill offered by Paul Ryan’s House Republicans. The subsidies under current law are replaced by tax credits, a discount by alternative means administered by the conservatives’ most beloved agency, the Internal Revenue Service.
But how big a discount, and against what price? Objections to the credit tend to slide by what it will and will not buy.
Let’s first run through the different ways the tax code can subsidize the purchase of health insurance. There are three.
The first is what the wonks call exclusion. Under current law, premiums on your group health insurance policies paid by your employer are not taxed as income (excluded from taxation). If you look at your pay stub, you won’t find it listed as part of your earnings.
The exclusion benefits higher-income earners. Why? Well, since your tax rate rises with income, this means the higher your income, the bigger the subsidy. If you’re in the 15 percent bracket, an untaxed premium of, say, $1,000 means $150 in taxes you didn’t have to pay. If you’re in the 25 percent bracket, for this same $1,000, it’s $250 in taxes you have avoided. And so on. That’s the evil genius of the current system. The benefit of the exclusion rises with income. It’s upside-down welfare.
The second way is through a deduction on your taxes. This works in the same way as the exclusion: Its value as a tax cut grows with the taxpayer’s income. A difference is that you apply for the deduction when you file income taxes, if you itemize your deductions. However, the majority of taxpayers do not itemize, so for them any deduction for health care is worthless. So once again, it is higher-income families that are able to take advantage of itemizing, usually because they are homeowners and can deduct property taxes and the interest on their mortgages.
A third way of providing a discount is with a tax credit. A credit’s value is fixed. It does not rise with income, except in one important respect: It is limited by the extent of one’s tax liability. Tax credits are worth no more to a taxpayer than the amount of taxes he or she owes.
For instance, if the credit is set by the government at $1,000 and you only owe $500 in income tax, you don’t get $1,000. You just get your $500 tax liability erased. The idea is that the taxes you save will help you buy insurance. But if you don’t have much income, you don’t owe much in taxes, so you won’t save much from a credit, so you won’t get much help buying insurance.
A remedy for people at the lower end of the income scale is to make the credit “refundable.” In this setup, you get the full value of the credit regardless of tax liability or income. The government mails you or the health insurance company a check for the full credit. The full value of the credit goes to all taxpayers, rich and poor.
The current version of the Republican plan does this. But it also has the value of the credit increase with age, from $2,000 for those under 30 to $4,000 for those over 60, for the logical reason that health insurance costs are higher the older one is. The credit is refundable. It is capped at $14,000 for a family and can be claimed by no more than five persons in a family. The credits phase out for higher-income individuals.
Conservatives are not loving the refundable tax credit feature of the Republican plan, among other complaints. They consider refundability to be a welfare entitlement by another name. The problem for boosters of the bill is that without refundability, there would be a massive increase in the number of uninsured. The reason is that without refundability, millions of lower-income families would not be able to afford premiums in the individual market. And since the Republicans are doing away with the individual mandate, these people would not be required to buy insurance either.
The value of refundability to people depends on what they will have to pay for health insurance. Premiums will vary significantly in different states, from different insurance companies, for different levels of coverage. For many, the credits in the bill will be insufficient to make health insurance affordable. Presently, it is predicted that millions will lose coverage. We will know more when the Congressional Budget Office provides detailed estimates.
When there is any need for the government to finance anything, Republicans always prefer tax credits to direct public spending that requires tax revenue. This puts the action in the hands of the individual, rather than Satanic bureaucrats. It also whittles down the federal tax system.
The problem with the new bill to conservatives is that it commits heresy by making the credit refundable. The government will have to get money somewhere else—maybe other taxes!—to pay for the checks it will mail to individuals or their insurance companies.
In all three cases, the size of the subsidy, or discount or tax credit or whatever, still prompts the question: discount against what price? Health insurance tends to cost more the older you are. Under Obamacare, the prices according to age are constrained: As things stand, premiums for older persons can be no more than three times that for younger persons.
The Republican plan increases the allowed multiple for premiums available to older persons to five times the rate for younger persons, so the subsidy from a tax credit can easily be washed away by the increase in premiums for older persons.
So we end at the beginning—20 percent off what? The provision of a tax credit, even if it exceeds the current subsidies, does not mean that, after all is said and done, the Republican plan will leave a family better off. It’s hard to see how it could. It proposes to reduce costs and cut taxes while providing better benefits. It may increase a subsidy with one hand while allowing insurance companies to increase premiums more with the other.
As things stand politically, this plan looks like a dead duck. As others have explained, the intrinsic difficulty of satisfying conservatives’ diverse, incoherent criticisms of Obamacare render resolution impossible. Barack Obama’s health care reform may be with us for a while yet. The only question is who on the Republican side will get the blame for the failure to repeal it.