The Republican Party, from the White House to the Congress to the “red” state houses, remains bound and determined to crash President Obama’s signature Affordable Care Act. They could not accomplish this through repeated congressional repeal votes, so their last hope is a multi-state lawsuit which the Barr Department of Justice has determined not to fight, in an alarming abrogation of DOJ responsibility to enforce the laws of the United States.
There is an overriding and compelling reason for these continued attempts to drive the ACA over the cliff, beyond the inherent asshole-ness of Mitch McConnell, Donald Trump, and their supporters. This idea has been sold to their constituents as “saving the free market healthcare system,” but in reality, the market is far from “free.” Employer-subsidized healthcare insurance is the recipient of a “socialized welfare grant” that is larger than the combined budgets of three Cabinet departments. My assertion is that this money, the largest “tax expenditure” embedded in the U.S. tax code, and the benefits it brings to its corporate beneficiaries, is what the politicians and lobbyists are really trying to protect.
The hidden nature of tax expenditures
My long-time observation is that the large majority of Americans has no idea what a “tax expenditure” is. And that is intentional. For many in Congress, darkness is their friend.
There are two basic ways for any government to distribute part of the wealth generated by the society at large to constituents who desire, and often need, this favoritism. The first is simply to collect taxes and pay out some of that cash to the recipient citizens and businesses. For instance, we collect FICA taxes from most working Americans (but not the really rich ones), and we distribute this cash to Americans of retirement age as “Social Security” payments.  This particular direct expenditure has a large consensus of public support. Other direct expenditures, for instance national spending on education, has vocal critics in high places, ironically including the current Secretary of Education, Betsy DeVos.
Tax expenditures appear different from direct expenditures on the surface, but they are really not in the end. A tax expenditure is a special favor to a group of taxpayers to NOT collect taxes they would otherwise be required to pay. Economically, it is exactly the same as collecting those taxes and then providing a direct expenditure back to those same people. But tax expenditures are largely, and intentionally, invisible. Most Americans are unable to see taxes NOT collected from the politically-well-connected, so this type of government spending “flies under the radar.”
Here is a list of the largest tax expenditures by latest count. Note the top one by a large margin:
The tax exclusion for employer-sponsored health plans is currently near $173 billion per year. This is the amount of taxes that would have been collected if the value of the insurance that people get at work were taxed at its income value. But it is not. Neither the business nor the taxpayer pays any taxes on this form of employee compensation. Indeed, most employees do not see, and likely do not know, the cash value of this form of compensation, and so it is usually taken for granted.
I have gone around and around in online forums with people who swear that their health insurance is not “income” to them. But it is. To take another form of insurance, employer-provided life insurance, only the premiums for the first $50,000 of coverage are untaxed (another tax expenditure/subsidy). Premiums for any additional insurance amounts are taxed as income to the employee. In addition, the original ACA provided for a “Cadillac Tax” on health insurance premiums above a certain threshold to come into effect in 2020. It is a priority for Republicans that this challenge to “welfare for the rich” be stopped.
By comparison, the entire 2020 budget request for Betsy DeVos’s Department of Education is less than 40% of that health insurance tax expenditure value, at $64.0 billion (a 10% cut below 2019 levels and initially proposing to eliminate funding for the Special Olympics). Rick Perry’s Department of Energy proposed budget for 2020 is a mere $31.7 billion. Ben Carson’s entire proposed Housing and Urban Development budget for 2020 is only $44.1 billion. So the total expenditures from these these three cabinet departments is still less than this one tax expenditure subsidizing employer-sponsored health insurance.
Until the ACA, the self-employed and others needing to purchase their own insurance have not had this tax favoritism. Even under the ACA, many middle-income families must pay full-price without subsidy for their usually-high-deductible health insurance. Premium tax credits end at 400% of the federal poverty level, on a sliding scale, and cost-sharing reductions end at 250% of the federal poverty level. Lower-income families do receive what is effectively a tax subsidy for ACA marketplace insurance, but the total tax expenditure for these families is shown, also above, well down the list at $51 billion.
There is a political truism that a form of government welfare expenditure that “everybody gets” is not politically useful. There is no incremental power nor great incentive for the Republican Party created by near-universal government benefits. Many large health insurance companies have refused to compete in the ACA exchanges, or, like Iowa’s Wellmark, waited until some of the competition was driven out before they would enter with much more expensive plans. Indeed, Wellmark has been among the strongest champions of selling the more profitable “junk” plans that have recently been allowed, which skirt the original ACA rules on coverage like pre-existing conditions. These plans further harm the marketplaces by siphoning off young and unwary customers looking for cheaper insurance that often insures little.
When is insurance not insurance?
Related to this is the largely-hidden reality that much employer-provided “health insurance” is not insurance at all in the classical sense. Most large employers, and even many of those with as few as 100 workers, use the “insurer” to (1) administer an employer-specific pool of their own contributions, which are (2) paid out for current healthcare services on behalf of employees who get those services from approved providers at negotiated discounts. In effect, these employers are “self-insured.” So, what does the “insurance company” do?
A small part of those contributions goes to purchase “re-insurance” (usually from a specialty re-insurance company and not the plan administrator “insurers”) for larger and unforeseen claims. This is the “real” insurance in the employer-sponsored healthcare system. The rest is mostly a “current services” shuffle of money from employer to provider, with the “insurance company” acting as an intermediary and discount negotiator (and taking a profit cut).
For the most part the discounts make no sense except in a larger strategy by which U.S. hospitals and many other healthcare providers “charge high and discount heavy.” This is a profit maximization scheme by which very high “rack rates” (to use a hotel term) on services provided are really paid only by those people who do not have an insurance contract with the provider. Of course, these higher rates are often borne by the people who can least afford them. Discounts through the “insurers” are often as high as 70%. You can think of the discounted price as “the real price” of healthcare, just as your hotel room’s “real price” is the one marketed by Expedia or negotiated by a convention planner.
Going over the cliff
Basically, the tax exclusion for employer-sponsored insurance is a welfare payment to the insurance industry and subsidizing employers. If it were going to consumers directly rather than filtered through corporations, this would surely be attacked by those same Republicans as “socialized medicine.” We know this because that is exactly the charge against the ACA individual tax subsidies.
The numerous repeal votes with no replacement plan in place demonstrates how much the Republicans want to retain the employer-sponsored healthcare model and its massive tax welfare to the industry. What they expect the rest of the population to do for health insurance, I have yet to hear a Republican articulate.
One major reason for this “reckless driving” is the Republican fear of “socialized medicine,” which is a “Humpty Dumpty” word meaning anything they want it to mean. The ACA, rooted in Mitt Romney’s Massachusetts plan, is already farther to the political right than any of the many successful universal healthcare plans found in the rest of the civilized world, and thus will always fall short of being truly “universal.”  Ironically, that very fear of the ACA crashing is what has generated renewed and passionate interest among Democrats to shoot for some version of “Medicare-for-all” (whatever that means).
- The idea Social Security as an “insurance program” is quite overblown (again intentionally). It has always been a transfer of FICA cash collections to us “seniors.” But that is a “convenient fiction” and I won’t cover it here.
- I look at three successful country models that are in-between the current ACA plan and “Medicare-for-all” here.
“….we collect FICA taxes from most working Americans (but not the really rich ones), ”
One obvious and easy fix to Social Security would be lifting the cap on FICA taxes. As I approach Social Security, I’ll have access to a monthly income many Americans would kill for. But the FICA cap meant we had extra money to fund our 401(k)s over the decades.
We’ve been careful to make sure we’d never need to depend on the Social Security retirement-insurance system. Too-many Americans don’t do that, it’s true. They believe Social Security will provide enough cover. Let’s hope they’re right.
It’s a sadness that Social Security must be sold as a pension program instead of retirement-insurance program. But too-many American wouldn’t contribute to it as insurance. “Why should I work all my life to provide retirement to someone who didn’t take care of themselves along the way?”
Are Americans reasonably generous or What? In many ways, the latter.
FICA at one time captured its piece of over 90% of total payroll in the US. Because the cap has not kept up with inflation, we are now in the 80% range. Recapturing that 10% goes a long way to restoring solvency to the program.
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