Unions, Progressives Spurring Reversal On ‘Cadillac Plan’ Tax

Art Levine

When it comes to healthcare reform, Washington’s conventional wisom is, as always, wrong again.

Just about a week ago, when the House health reform bill included a tax-the-rich provision to boost purchasing insurance subsidies, that feature was dismissed as a non-starter” by pundits and some legislators. Policy wonks, from The Washington Post’s respected Ezra Klein to influential White House economic adviser Christina Roemer, had all hailed the Senate Finance Committee’s excise tax on so-called Cadillac plans as the essential financing mechanism necessary to pay for reform.

The implicit spin offered by some of Obama’s advisers, including Rahm Emanuel, centrists, and several policy experts was that anyone who disagreed with the value of the excise tax on insurers — later to be passed along to as many as 40% of workers through higher taxes or out-of-pocket costs— was somehow just a self-serving union leader seeking to preserve cushy, needless benefits.

But, lo and behold, by mid-week, Senator Majority Leader Harry Reid was sending signals that he was looking instead at various proposals to raise Medicare taxes on those earning over $250,000, and Obama’s budget director, Peter Orszag, was considering taxing investment income to help pay for Medicare and health reform. 

What happened? Unions, other progressives, some independent experts and a majority of Democratic House members continued to favor the House approach of essentially taxing millionaires, rather than placing the burden on working families. 

And, they argued, they not only had fairness on their side, but smart politics, too: This excise tax was causing serious political problems with the progressive base, not just unions,” observes Alan Charney, the program director for USAction, the primary grass-roots arm of the leading advocacy coalition, the 1,000-group Health Care for America Now.

With the public against taxing health care benefits by at least a two-to-one margin, the excise tax, it turns out, was a non-starter” with the American people, if not policy insiders. A lot of middle-income people are going to feel like they’re paying an extra tax, while the only fair way to pay for reform is to tax those who benefited from this economy: the rich,” Charney says. An earlier version that directly taxed workers never caught on, and this work-around approach of hitting those insurers that offer the plans with a 40% excise tax doesn’t seem to fly with the public, either, even thought it passed the Senate Finance Committee.

Opponents of excise taxes have been arguing that these high-cost plans weren’t Cadillac plans at all, but costly because they served people in physicially risky professions like mining or were aiding retirees with more expensive care. And their advocacy work was aided by solid research from government panels, including the Congressional Joint Committee on Taxation, and non-profit groups raising the alarm.

Perhaps most criticially, a well-regarded think tank and advocacy group, Citizens for Tax Justice(CTJ), has been serving as the go-to number-crunchers making the case on the Hill for fair taxation to pay for health reform. With CTJ and its research arm, the Institute on Taxation and Economic Policy, getting less than five percent of their funding from unions, and most from foundations, it’s got the independence and intellectual rigor needed to show that it’s not just unions that are looking for alternative, fairer ways to pay for reform. It also prepared an important report that included an analysis of both the Joint Committee’s findings and its own review of the excise tax provision’s impact, and shared both assessments with the Communications Workers of America; the union then crafted and publicized the research in a report called, Health Care Excise Tax = A Big Middle Class Tax Increase.” Its disturbing findings, in turn, became the basis for a powerful HCAN television ad warning about the impact of the Senate Finance Committee’s excise tax .

Steve Wamhoff, the CTJ legislative director, told In These Times, The unions have been pointing out the problems, but now people [on the Hill ]are realizing that these so-called Cadillac plans’ aren’t necessarily that generous: they are plans for older workers and those with bigger health problems.”

He says there are sound policy reasons” for getting rid of the excise tax, especially because unearned, investment income isn’t even taxed at all to pay for Medicare. 

The upshot? If Paris Hilton is living off investments, she doesn’t contribute one cent to the Medicare fund,” while workers have to pay part of their payroll tax.

Reid is considering a proposal that would raise slightly the amount of the payroll tax on couples earning more than $250,000, but taxing investment income is also being studied. As the Wall Street Journal described the proposal Reid is considering (a variation of one of the progressive options proposed by CTJ):

Senators have proposed several options to fill the gap, but the Medicare tax proposal is gaining steam. It would raise the payroll tax to 1.75% from 1.45% for individuals earning more than $200,000 a year and couples making more than $250,000, aides said. No estimate was available of how much the increase would raise.

The move could prove popular with labor unions and others who have strongly opposed the initial plan for a 40% tax on high-value insurance plans, those worth at least $8,000 for individuals or $21,000 for families.

AFL-CIO President Richard Trumka said Thursday that a payroll-tax increase on high earners is fairer. We think that’s far preferable to taxing the plans,” Mr. Trumka said in an interview. Others say an extra tax on high earners would crimp the economy, and that taxing the high-value plans would limit wasteful medical spending.

But the groundwork for this shift in direction was made possible, in part, by the spreading of a message for fair taxation that has been pushed for months by a nationwide coalition of unions, church groups and non-profits, Rebuild and Renew America Now, whose leaders met with legislators and wrote letters, starting in the summer. It’s allied with USAction and Citizens for Tax Justice.

But good ideas, no matter how well-meaning, are not enough to influence policy-makers. On top of all that, local union leaders and other progressives have joined in recent weeks an under-the-radar grass-tops” lobbying campaign involving influential local leaders selling liberal Senators on backing a tax-the-rich approach. Meanwhile, Senator Reid, facing a potentially tough re-election fight, has been getting a clear messge from some unions critical to his support that a tax on high-cost plans could spur a revolt from their members. Some critics on the left (via Firedoglake) worry that he’s been consulting (again) with the elusive Republican Senator Olympia Snowe on the Medicare tax, so it could be a prelude to a sell-out on the public option.

Yet Alan Charney, among others, sees the new Sentate interest in progressive taxation as a hopeful indicator, even as other contentious issues remain to be settled between both houses of Congress, especially the House’s draconian anti-abortion rider.

Here’s how he sees the legislative dance over progressive taxation potentially playing out. First, both houses of Congress pass their versions of progressive, tax-the-rich financing. Then, he hopes, The excise tax is squeezed out, so in conference they come up with financing that doesn’t involve the excise tax anymore.” Given how far reform advocates have come on financing and keeping some form of the public option alive, these are realistic expectations for the tense health-care combat that lies ahead. 

The Senate leadership’s new direction on taxation, he observes, is a sign that there’s a better chance that the final bill will be good, and we’re helping this process along.”

Art Levine, a contributing editor of The Washington Monthly, has written for Mother Jones, The American Prospect, The New Republic, The Atlantic, Slate​.com, Salon​.com and numerous other publications.
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