Should Health Care Tax Rich Income or Rich Plans?

Whether we get the House or Senate version of health care reform, the tax man cometh. But in what form? The House health care plan unveiled today leans on a surtax on rich people to pay for the expansion of Medicaid and insurance subsidies for less fortunate Americans. The Senate Finance plan dreamed up an excise tax on richer insurance plans. Those might sound similar because I described them both using the words "tax" and "rich," but they're very different ideas, for a couple reasons.

The first major difference is that the 5.4% surtax is simply slapped on individuals making more than $500,000 and couples earning more than $1 million. The excise tax on expensive insurance is designed to impact more plans every year to persuade an growing swath of employers to switch to cheaper coverage. But even at the start, the excise tax will impact a lot of Americans who we wouldn't consider rich. Plenty of unions have organized to increase their compensation in the form of health care benefits, as opposed to taxable income, which is precisely why I get email every week from some union PR person with an argument against eliminating the tax subsidy on these benefits. The unions might be right that the excise tax reverses compensation gains they've spent decades earning, but the Senate Finance bill's architects have an ulterior motive.

That leads to the second difference between these tax schemes. The surtax isn't really about changing behavior. It's just a tax on high income included for the sole purpose of making the bill deficit neutral. The excise tax is actually designed to have a specific incentives: To encourage employers to switch to cheaper plans and move more of their workers' compensation into wages. In fact the Joint Committee on Taxation estimates that up to 80 percent of the revenue from the excise won't come from the excise tax, but from income taxes on wages that increase as a result of that switch. (Whether that works of course is a matter of substantial debate.) In that sense, I guess you could say both houses of Congress sic the tax man on your income.