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          THINK TANK                Explaining the excise tax
   1    The budget deficit was      If a new tax is passed and no one actually pays it, can it fund health-care
        about $390 billion in the
                                    reform?
        first quarter, CBO
        estimates.
                                    It sounds like a zen koan for public policy students. But the Senate
        Economists David            Finance Committee is banking on it. That is, in short, the theory behind
   2    Cutler and Neeraj Sood      the excise tax, which is projected to pay for a quarter of health-care costs
        project that health-care                                                                                   Sponsored Links
                                    in the first 10 years, and more after that.
        reform could add
        400,000 jobs.
                                    On a superficial level, the policy is simple enough: Health-care premiums      Obama Urges Homeowners to Refinance
                                    above $21,000 for families, and $8,000 for individuals, are hit with a 40      Rates Hit 3.54% APR! Calculate New Mortgage Payment Now.
   3    The Federal Reserve
                                                                                                                   www.SeeRefinanceRates.com
        embraces some new,          percent surtax. So if your family's insurance plan costs $23,000 a year,
        more behavioralist,
                                    then $2,000 of it will be taxed at 40 percent. The tax will be levied on the
        theories of how bubbles
        form.                       insurer, who will in turn pass it onto your employer, who will in turn pass    Refinance Now 4.0% FIXED!
                                    it onto you. But that's only if it doesn't work.                               $160,000 Mortgage for $633/mo. Free. No Obligation. Get 4
        Kevin Carey                                                                                                Quotes!
   4                                                                                                               Mortgage.LendGo.com
        investigates whether        If it does work, your insurer will design more affordable plans that don't
        colleges do a good job.
                                    run afoul of the tax because your employer will refuse to purchase plans                                                     Buy a link here
        "I've got nothing to        that do run afoul of the tax. That's the point of the policy: to give
   5    hide," and other            employers an incentive to become more value-conscious purchasers of
        misunderstandings of                                                                                        Post Blogs
                                    health-care insurance. "Employers are not shopping very well," says MIT
        privacy.                                                                                                     44                             Economy Watch
                                    economist Jonathan Gruber. "They're signing up with Blue Cross or                All We Can Eat                 The Hearing
                                    whichever insurer they know, because what do they care? They just pass           The Daily Dose                 Solutions
                                                                                                                     The Fix                        White House Watch
        LATEST TWEETS               it onto wages." But employers don't like wasting their money and workers
                                    don't like big jumps in health-care costs.
  For Boston folks, I'm talking                                                                                     Blog Roll
  health-care reform with
  @jrovner at 6pm tonight.          According to the Joint Committee on Taxation, the tax will raise a shade         The American Scene             Paul Krugman
                                                                                                                     Atrios                         Real Time Economics
  Deets here:                       over $200 billion over the first 10 years, and more after that. The bulk of      Baseline Scenario              Rortybomb
  http://bit.ly/fNLY1 40 minutes
  ago
                                    the money -- $142 billion, according to the JCT -- will come because             Brad DeLong                    Ryan Avent
                                                                                                                     Economix                       Spencer Ackerman
  RT @AnnieLowrey: Soros'           people won't pay the tax. Employers are expected to choose cheaper               Felix Salmon                   The Stash
  new Institute for New             plans, and redirect some of that money into paychecks. That means                Justin Fox                     Steve Benen
  Economic Thinking might                                                                                            Kevin Drum                     Tapped
  want to think about gender        more of a worker's compensation will be in wages, and wages, unlike              Marginal Revolution            Taxvox
  diversity. http://bit.ly/d5dRd3   health-care benefits, count as taxable income. That's how the tax raises         Mark Thoma                     Tom Laskawy
  >> Yipes. about an hour ago                                                                                        Matthew Yglesias               The Treatment
                                    money even if it's not being paid.                                               Megan McArdle                  The Vine
        Follow it here
                                    The excise tax was not the first choice for most policymakers. Health
    SEARCH THIS BLOG                economists think the primary distortion in the health insurance market is
                                    that insurance provided by employers is tax deductible. That means a
                             Go     dollar paid in health benefits is worth more to a worker than a dollar paid
                                    in wages. Originally, Sen. Max Baucus sought to fund health-care reform
                                    by capping the employer deduction. But unions and employers howled,
        RECENT POSTS                and the Senate Finance Committee quickly backed off.
    House and Senate
     negotiators                    The excise tax was a compromise thought up in Sen. John Kerry's office.
     considering new                Actually, "thought up" isn't quite the right term: It was unearthed by a
     Medicare tax                   clever staffer combing old ideas from the 1994 reform effort.
    New math for the
     stimulus                       The appeal of the proposal is that it has the same effect as capping the
    The importance of               deduction, but with very different politics: It taxes "insurers" rather than
     community rating               "employers," which sounds a lot better. The tax, however, is passed
    Prescient people saying         down to employers, so the impact is virtually identical. If anything, the
     scary things                   rhetorical populism obscures a policy that's actually a bit less




http://voices.washingtonpost.com/ezra-klein/2009/10/explaining_the_excise_tax.html                                                                                     4/5/2010
Ezra Klein - Explaining the excise tax                                                                               Page 2 of 11

  Previewing the final        progressive. The excise tax hits all qualifying insurance plans at 40
   health-care bill
                              percent, regardless of the worker's income. Capping the deduction would
 Entries By Category          mimic whatever tax rate the worker was already paying, which would
  2010 Midterms               mean lower-income workers would face a smaller burden. "The irony,"
  2012 Presidential           says the New America Foundation's Len Nichols, "is that they made it
  Afghanistan                 more friendly to the unions, but they made it less friendly to the union’s
  Articles
                              workers."
  Barack Obama                They also made it more friendly to the deficit. Early on, the tax will hit
  Books                       relatively few people. The average cost of a family health insurance
  Budget                      policy in 2009 was $13,375. In most cases, it takes a strikingly generous
  California                  plan to pass that $21,000 threshold (there are a few exceptions, like
  Cartoons                    workers in dangerous jobs who have health insurance premiums
  Charts and Graphs           reflecting the risks of their occupation). But the trick of the excise tax is
  China                       that the cap grows at the same rate as the consumer price index, plus
  Climate Change              one percentage point. That's a lot slower than health-care spending,
  Congress                    which means that more and workers will see their policies bumping up
  Crime and punishment
                              against the tax. What begins as a tax on generous policies could quickly
                              become a tax on average policies.
  Democrats
  Economic Policy             When a policy bumps up against the tax, a couple of different things
  Economics                   could happen. One is that the employer just passes along the tax, either
  Economy                     increasing premiums for the employee or taking it out of wages. The
  Education                   other is that the employer chooses a plan that's beneath the threshold.
  Europe                      That plan might have a higher deductible, or more co-pays, or tighter
  Federal Reserve             networks, or less coverage for brand-name drugs. It will, in other words,
  Financial Crisis            be more like the managed care of the 1990s, which brought down
  Financial Regulation        spending and didn't hurt health outcomes, but which people really didn't
  Food
                              like. "Managed care worked," says Gruber, "but workers didn’t know it.
                              They didn’t see the benefit. We've got to make them feel the pain of not
  Foreign Policy
                              reforming and enjoy the benefits of reforming." In this case, the pain will
  Government
                              be the excise tax. The benefit will be the higher wages they get, and the
  Guest Graph
                              lower tax burden their children face, when their employers begin
  Health
                              choosing higher-value policies. The question is whether they'll ever
  Health Coverage
                              realize there's a connection between the two.
  Health Economics
  Health Reform               The other hope is that the rest of the bill -- in particular, the delivery
  Health Reform For           system innovations and the modernizations of the health-care system's
   Beginners                  infrastructure -- will also work to push down costs, and so growth in the
  Health of Nations           system will slow and the excise tax won't move down the income ladder.
  History                     "It's an implicit bet on reform working," explains Harvard's David Cutler.
  Housing Crisis              "If we can't figure out how to make the cost savings work, the thing will
  Inequality                  blow up." That's true not just for the excise tax, but also for the subsidies,
  International Health Care   and for Medicare, and for everything else. If spending doesn't slow, then
  Interviews
                              the system collapses. In that scenario, the excise tax isn't so much a tax
                              as it is a cost-control measure. "The underlying goal is to provide a
  Israel/Palestine
                              strong-enough incentive for reducing premiums that nobody has to pay
  Journalism
                              it," says OMB director Peter Orszag. If we don't become a nation of tax
  Legal
                              evaders, in other words, the policy will have failed.
  Lunch Break
  Markets                      By Ezra Klein | October 20, 2009; 1:55 PM ET
  Medicare                     Categories: Health Economics , Health Reform For Beginners
  Movies
                               Save & Share:
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                               Next: Explaining the excise tax: part 2
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                               Obama Urges Homeowners to Refinance
  Senate
                               Rates Hit 3.54% APR! Calculate New Mortgage Payment Now.
  Social Security              www.SeeRefinanceRates.com
  Solutions
                               Refinance Now 4.0% FIXED!
  Stimulus                     $160,000 Mortgage for $633/mo. Free. No Obligation. Get 4 Quotes!
  Tab Dump                     Mortgage.LendGo.com

  Taxes
                               PennyStocks Soaring 600%
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                              Comments
  Full Category Archive

 Entries By Date               I'm confused - instead of increasing wages, why won't employers just take that
  Full Weekly Archive          dollar not spent on health care and increase dividends? What's to prevent this from
                               being a massive transfer of wealth (granted, not of much actual value as the health
                               care dollar is not being spent productively, but value nevertheless) away from
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http://voices.washingtonpost.com/ezra-klein/2009/10/explaining_the_excise_tax.html                                      4/5/2010
Ezra Klein - Explaining the excise tax: part 2                                                                                                                  Page 1 of 4

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 washingtonpost.com > Business > U.S. Economy > Ezra Klein




 About Ezra Klein |          On Twitter | Video Archive on Bloggingheads |        RSS Feed | E-Mail Ezra

          THINK TANK                Explaining the excise tax: part 2
                deficit was
   1 The budget billion in the
     about $390
                                    Sigh. On the same day I publish my long explanation of the excise tax,
                                    the Center for Budget and Policy Priorities publishes their even longer
        first quarter, CBO
        estimates.                  explanation of the excise tax. You just can't win against these wonks.

                                    But their report touches on something I meant to address in a follow-up
                David
   2 EconomistsNeeraj Sood
     Cutler and                     anyway: The excise tax is controversial because it has losers, and some
        project that health-care                                                                                   Sponsored Links
                                    of them are sympathetic. No one sheds a tear for the Goldman Sachs
        reform could add
        400,000 jobs.               executives who get $40,000 health-care plans. But though extremely
                                                                                                                   Obama Urges Homeowners to Refinance
                                    high-cost health-care plans are concentrated among the wealthy, they're        Rates Hit 3.54% APR! Calculate New Mortgage Payment Now.
   3 The Federal Reserve
     embraces some new,
                                    not limited to the wealthy. Workers in high-risk professions, or workers       www.SeeRefinanceRates.com

        more behavioralist,         laboring in high-cost areas (insurance is more expensive in New York
        theories of how bubbles     than in Montana), have pricier health-care plans. Older workers, or
        form.                                                                                                      Refinance Now 4.0% FIXED!
                                    workers who have negotiated really good benefits, also have pricier            $160,000 Mortgage for $633/mo. Free. No Obligation. Get 4
                                    health-care plans. And unions represent a lot of folks who fit some or all     Quotes!
   4 Kevin Carey whether                                                                                           Mortgage.LendGo.com
     investigates                   of these boxes.
        colleges do a good job.
                                                                                                                                                                  Buy a link here
                                    For the tax's purposes, a high-cost health-care plan is a plan that costs
   5 "I've got nothing to
     hide," and other
                                    more than $21,000. The average family health-care plan this year cost
        misunderstandings of        about $13,375. That's a huge difference. To get a sense of the disparity,       Post Blogs
        privacy.                    the health-care plan chosen by the average member of Congress costs              44                              Economy Watch
                                                                                                                     All We Can Eat                  The Hearing
                                    $13,446. So we're talking about plans that are more generous than what           The Daily Dose                  Solutions
                                    most members of Congress get. A recent Boston Globe article actually             The Fix                         White House Watch
        LATEST TWEETS
                                    took a look at a $20,400 plan -- that is to say, a plan that's not quite
  For Boston folks, I'm talking     generous enough to be taxed, but might be by 2013. Among other things,          Blog Roll
  health-care reform with
  @jrovner at 6pm tonight.
                                    it included money for gym memberships, yoga and nutritional counseling.          The American Scene              Paul Krugman
                                                                                                                     Atrios                          Real Time Economics
  Deets here:                       Surgeries were free, as were MRIs and X-rays and CT scans. Three                 Baseline Scenario               Rortybomb
  http://bit.ly/fNLY1 41 minutes
  ago
                                    months of prescription drugs tops out at $30. To avoid the tax, some of          Brad DeLong                     Ryan Avent
                                                                                                                     Economix                        Spencer Ackerman
  RT @AnnieLowrey: Soros'           these perks would be curtailed.                                                  Felix Salmon                    The Stash
  new Institute for New                                                                                              Justin Fox                      Steve Benen
  Economic Thinking might           That's not to attack individuals getting good health-care plans. But             Kevin Drum                      Tapped
  want to think about gender                                                                                         Marginal Revolution             Taxvox
  diversity. http://bit.ly/d5dRd3
                                    remember that the money paying for that plan isn't taxed, while the plan
                                                                                                                     Mark Thoma                      Tom Laskawy
  >> Yipes. about an hour ago       that an unemployed person purchases is taxed. The excise tax                     Matthew Yglesias                The Treatment
                                    essentially repeals the tax subsidy for the highest levels of employer-          Megan McArdle                   The Vine
        Follow it here
                                    provided health-care coverage -- a subsidy which is, on average, hugely
                                    regressive. And even with the excise tax, $21,000 will still be tax free for
    SEARCH THIS BLOG
                                    the employed, while none of that money will be tax-free for the
                              Go
                                    unemployed.

                                    But what of the workers whose demographics characteristics make their
        RECENT POSTS
                                    plans expensive? The Finance Committee made a couple of changes to
                                    the tax in order to minimize such collateral damage. Workers in high-risk
    House and Senate
                                    professions or who are above 55 years old, for instance, don't see the
     negotiators
     considering new                tax start until their family's plan reaches $26,000. High-cost states have a
     Medicare tax                   three-year transitional period during which they need to get their costs
    New math for the                under control, but that's not, in practice, very long.
     stimulus
    The importance of               The other important piece of the excise tax is that the threshold grows
     community rating               more slowly than health-care costs. That means that the affected plans
    Prescient people saying         eventually become less generous, at least if health-care spending




http://voices.washingtonpost.com/ezra-klein/2009/10/explaining_the_excise_tax_part.html                                                                              4/5/2010
Ezra Klein - Explaining the excise tax: part 2                                                                        Page 2 of 4

    scary things              doesn't slow. That'll make a lot of people very angry, as it will mean
  Previewing the final        employers will begin moving them to something that looks more like the
   health-care bill
                              managed care of the '90s. Managed care is one of those weird policy
 Entries By Category          experiments that worked perfectly -- costs came down, wages went up,
  2010 Midterms               and there's never been any evidence that health outcomes suffered --
  2012 Presidential           but people utterly hated it.
  Afghanistan                 Like many wonks, I think it's better for us to move toward managed care
  Articles                    than to let the nation bankrupt itself over health care. But the choice
  Barack Obama                won't look like that to people who think their employer pays for their
  Books                       health care (as opposed to folks who realize their potential wage
  Budget                      increases are paying for their health care). That's why Harvard economist
  California                  David Cutler says that "if we can't figure out how to make the cost
  Cartoons                    savings work, the thing will blow up." But that's true for the subsidies, for
  Charts and Graphs           Medicare and for the rest of the health-care system.
  China
                              The end result is that either the excise tax -- alongside rest of health-care
  Climate Change              reform -- works in slowing cost growth and making sure most people
  Congress                    don't face it, or it doesn't work and creates a backlash against itself. If the
  Crime and punishment        policy doesn't work, it won't survive.
  Democrats
  Economic Policy              By Ezra Klein | October 20, 2009; 3:25 PM ET
  Economics
                               Categories: Health Economics , Health Reform , Health Reform For Beginners

  Economy                      Save & Share:
  Education                    Previous: Explaining the excise tax
  Europe                       Next: The case for taxing health benefits
  Federal Reserve
  Financial Crisis
  Financial Regulation         Sponsored Links
  Food                         Obama Urges Homeowners to Refinance
  Foreign Policy               Rates Hit 3.54% APR! Calculate New Mortgage Payment Now.
                               www.SeeRefinanceRates.com
  Government
  Guest Graph                  Refinance Now 4.0% FIXED!
  Health                       $160,000 Mortgage for $633/mo. Free. No Obligation. Get 4 Quotes!
                               Mortgage.LendGo.com
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  Health Economics             PennyStocks Soaring 600%
                               Sign up for FREE email alerts on stocks that jump 600% and more!
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                               www.CrazyPennyStocks.com
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                                                                                                    Buy a link here
   Beginners
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                              Comments
  Housing Crisis
  Inequality
                               In this opinion, the author makes the statement that "insurance is more expensive in
  International Health Care
                               in New York than in Montana".
  Interviews
  Israel/Palestine
                               Why IS insurance more expensive in New York than in Montana? Is the per capita
                               cost of health care in New York higher than that of Montana? Conversely, is the
  Journalism
                               lifespan in New York higher than that of Montana? What could New York do to be
  Legal                        more like Montana? Finally, if the cost of insurance in New York was more like the
  Lunch Break                  cost of insurance in Montana, would we need health care reform?
  Markets                      I am agreeing: health care cost issues are largely State-based, not Federal.
  Medicare
  Movies                       Posted by: rmgregory | October 20, 2009 3:55 PM | Report abuse

  Obama administration
  Political Science
                               "If the policy doesn't work, it won't survive."
  Polls
  Poverty                      That's nice to say Ezra, but we know NOW that its just not going to work.

  Primary Documents            When you say this (correctly):
  Republicans
                               "High-cost states have a three-year transitional period during which they need to
  Senate                       get their costs under control, but that's not, in practice, very long."
  Social Security
                               you're being very generous with your word choice. There's no expert around that
  Solutions
                               thinks three years will be sufficient to address the reasons that certain states are
  Stimulus                     higher cost. Which means after the "transitional period"- we'll have an SGR-like
  Tab Dump                     exclusion/policy change/etc. We know that now, not in 2015. So when you say "if it
                               doesn't work, it won't survive"-- we know it won't work NOW, so why should it
  Taxes
                               survive, particularly if its being used to claim deficit-neutral reform?
  Tech
  Think Tank                   Posted by: wisewon | October 20, 2009 3:55 PM | Report abuse
  Unions
  Urban Policy
  Video                        rmgregory,

  Full Category Archive        Demand for health care highly correlates with physician/health provider
                               concentration. If a state has more docs per capita, they have higher costs. Many
 Entries By Date               doctors don't like living in rural states. This is the #1 factor. Supply DRIVES
                               demand under our current system.




http://voices.washingtonpost.com/ezra-klein/2009/10/explaining_the_excise_tax_part.html                                 4/5/2010

				
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