How to pay for health care reform? Maybe these new taxes

WASHINGTON — Democratic leaders, worried that high price tags might derail their health care plans, are looking at a raft of ideas both old and new to salvage their legislation. Each proposal carries risks of its own, however, lawmakers and outside experts said.

Democrats in the House of Representatives, for example, acknowledge that they're looking at a value-added tax, which is used widely in Europe but has never gone anywhere in the U.S. Also on the table are a 2 percent surtax on the income of the wealthy and a hike in taxes on sodas.

"The average American is already worried about government intrusion," said Mark V. Pauly, an economist at the Wharton School of the University of Pennsylvania, and the soda tax "sounds like the school nurse."

Rep. Robert Andrews, D-N.J., the chairman of an Education and Labor subcommittee, acknowledged, "Every revenue raiser is something someone doesn't like." He added, however, "What we're going to have to find is the right, equitable mix of policy and politics to get this done."

In the Senate, Democrats are scrambling to shrink the Finance Committee's legislation after a preliminary estimate from the Congressional Budget Office put the bill's cost at $1.6 trillion over 10 years. They're scaling back subsidies for families to buy insurance, one of the most expensive parts of the bill. Lawmakers in both chambers are trying to bring their bills' price tags to below $1 trillion over 10 years.

Besides considering new taxes and scaled-back subsidies, lawmakers are turning to employers to help pay for the costs of insuring their workers.

Here's a rundown of some of the ways they're trying to crack the cost problem:


The value-added tax, which taxes goods at each stage of production, has been floating around as a potential revenue raiser for decades. However, it's been considered radioactive since House Ways and Means Committee Chairman Al Ullman, D-Ore., was defeated in 1980 after talking up the levy. The VAT, which is essentially a consumption tax, is regressive, which means it hits lower-income people harder than upper-income people, making it unpopular among liberal economists and labor and consumer groups.

Nevertheless, the VAT has gotten a lot of attention from academia and research centers as a funder of a health care overhaul, and it has some influential proponents.

Ezekiel J. Emanuel, a special adviser for health policy in the Office of Management and Budget, has written favorably about using a VAT tax to finance a health care overhaul. He's the brother of White House Chief of Staff Rahm Emanuel. Leonard Burman, the director of the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution, also has advocated a VAT tax.

A value-added tax of 1 percent to 1.5 percent could raise $600 billion over 10 years, according to estimates that are circulating on Capitol Hill. If necessities such as housing, education and medical care were exempted to soften the blow for lower-income people, then the rate might have to increase slightly to raise the same amount.

Many are skeptical that Congress would ever approve a VAT.

Jonathan Oberlander, who teaches health policy at the University of North Carolina at Chapel Hill, said he'd be surprised if the VAT made the final cut of revenue raisers. "Health care reform has enough problems as it is without taking on the VAT," he said. Still, he said, at this point in the process, "It's basically a question of which poison or poisons do you want to drink?"


The Ways and Means panel also is discussing a 2 percent surtax on the incomes of the wealthy. Such a surtax would target taxpayers who earn more than $200,000 annually or households that earn more than $250,000. It would raise an estimated $256 billion over a decade, according to the estimates floating on Capitol Hill. Unlike some of the other tax proposals on the table, this one would meet President Barack Obama's campaign promise of no new taxes for Americans who earn less than $200,000 a year.

Oberlander said that a surtax was the "most straightforward way to finance reform from a Democratic perspective," although it opens Democrats up to accusations of "class warfare."

Pauly agreed that such a surtax is "probably the way you have to go," but added that it wouldn't raise enough money. "You have to be honest and say if we're going to have to go down the income distribution to get the money," he said.


Another possibility: increasing the Medicare payroll tax, which the employer and the employee pay. An increase of 0.65 percentage point would raise $600 billion over a decade, according to the estimates.


Some economists support another idea that's under consideration: raising "sin taxes." Such penalties, they say, could help discourage unhealthy behavior.

Jonathan Gruber, a professor of economics at the Massachusetts Institute of Technology, said he preferred sin taxes to a VAT or payroll tax. In addition, he'd rather see a tax on alcohol than on sodas.

Still, he said, the revenue from sin taxes would be relatively small and wouldn't rise with the cost of health care. Overall, he hopes that a health care overhaul is financed primarily by making changes in the health care system and by taxing employer-provided health benefits, as well imposing a sin tax.


Lawmakers in the House and the Senate are looking to employers to help pay for revamping health care, but they're going about it in different ways. House Democrats, in a draft released Friday, proposed an 8 percent payroll tax on employers who don't offer insurance. Some small businesses would be exempt.

A Senate Finance Committee outline that leaked last week details a variety of options for employers, including one that doesn't require them to offer coverage. In that case, they'd be required to shoulder half the cost if their workers ended up on Medicaid, the state-federal program for the poor, or 100 percent of the cost if their employees received tax credits to subsidize buying insurance through newly created exchanges.

The provision is designed to assuage critics, who say that, given the chance, some employers would simply shift the responsibility for their employees' insurance to the federal government.

The amount of the potential Medicaid charge isn't spelled out, but in 2006 the annual average Medicaid cost per adult was figured at about $2,100, according to the Urban Institute and the Kaiser Commission on Medicaid and the Uninsured. (The commission, like Kaiser Health News, is part of the Kaiser Family Foundation, a nonpartisan research organization.)

"They're saying, if you shift your employees onto us (the government health plans), you'll still have to pay for them," said Paul Fronstin of the Employee Benefit Research Institute, a nonpartisan research organization in Washington.

Requiring employers to help finance Medicaid and the tax credits helps solve the financing problem, but it mainly affects companies with low-income workers, raising concerns that it will discourage their hiring.

"It will affect their decision to hire," said James Gelfand, senior manager of health policy at the U.S. Chamber of Commerce. "If they need to hire a janitor or a salesclerk, in addition to paying them $7 an hour, they're going to have to assume they will have to pay these other costs."

Other options in the Finance Committee document include imposing a penalty on employers who don't offer insurance. "The Finance bill is still a work in progress," said Frank McArdle, who heads the Washington office of the benefits firm Hewitt Associates. "They're trying to find a way of keeping employers in the game of providing health care coverage without having an exodus from employer plans."


To lower the cost of its bill, the Finance Committee is ratcheting back the government subsidies that would be available to moderate-income families and older people to purchase insurance in the proposed exchanges.

Last November, Sen. Max Baucus, D-Mont., the committee's chairman, recommended that tax credits be provided to people with incomes up to four times the federal poverty level, or $43,000 for individuals and $88,000 for a family of four. However, the committee's draft would limit the subsidies to those with incomes that are no more than three times the poverty level: single people who make $33,000 a year and families that earn $66,000. The House Democrats' bill also would limit the subsidy to those with incomes at three times the poverty line.

By lowering the threshold in that manner, lawmakers might leave out about 4.6 million people, Urban Institute researcher John F. Holahan said.

Three times the poverty level is too low, said Judith Solomon, a senior fellow in health policy at the Center on Budget and Policy Priorities, a policy research center. "I would say the top income levels for the subsidies should be set high enough to make sure everyone can afford coverage."

(Chris Weaver and Mary Agnes Carey of Kaiser Health News contributed to this story.) (Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy-research organization that isn't affiliated with Kaiser Permanente.)


Coverage of the nation's health care debate


Kaiser Health News on McClatchy

Health overhaul hard enough, but then there's paying for it

Obama signs law on tobacco products

Congress stuffs war-funding bill with cash for other items

Agents say DEA is forcing them illegally to work in Afghanistan

Check out McClatchy's politics blog: Planet Washington