Presidential campaigns can be hesitant to put out policy proposals because these ideas are easily caricatured and attacked by political opponents. So, it takes some real courage to put plans in front of the electorate.
That’s why Bobby Jindal, Marco Rubio and Scott Walker deserve credit for their willingness to put forth thoughtful proposals to repeal the Affordable Care Act (ACA) and replace it with sensible, patient-centered reforms. There are certainly policy differences between the three candidates’ proposals, and voters would be well-served by a robust discussion about the distinctions between them.
Specifically, Rubio’s proposal to gradually phase out the existing tax preference for employer-sponsored health insurance and replace it with a tax credit to individuals for the purchase of health insurance is perhaps the boldest and most impactful of all the health care reform ideas that have been proposed thus far. Indeed, there is no single policy change that would be more responsible for reducing health care costs in the United States.
But Obamacare’s supporters are making inaccurate claims that Rubio’s proposal will either raise taxes or increase health insurance premiums on many Americans. Both of these claims need to be debunked.
A bit of history is in order. Since an Internal Revenue Service ruling in the 1940s, the tax code has provided an uncapped incentive for employers to furnish health benefits to their employees. That’s because the value of health benefits furnished by employers is excluded from the taxable income of employees.
Health care benefits for employees, then, are effectively purchased with “pre-tax” dollars. In contrast, individuals who want to purchase health insurance on their own are generally required to purchase these benefits with “after-tax” dollars, raising their effective cost. That’s why about 150 million Americans get their health benefits through the workplace. And it’s also one of the reasons why health spending has been driven upward over time.
The passage of Obamacare will bring significant changes to the status quo. Why? The law effectively ends the open-ended tax incentive for employer-sponsored health insurance by imposing a provision known as the “Cadillac Tax.” Beginning in 2018, employers that offer health insurance plans that exceed a certain value ($10,200 for individual coverage in 2018, increasing yearly) will be required to pay a tax of 40% on any benefits provided in excess of that threshold.
That means employers will no longer have an unlimited tax incentive to provide health benefits to their employees — and the plans they offer are sure to change as a result.
Now, back to Rubio’s proposal. By gently phasing out the current tax treatment of employer-sponsored health insurance and replacing it with a tax credit that is available to every American, Rubio is trying to equalize the treatment of health benefits purchased by individuals and through employers while controlling costs and to do so without the imposition of a new tax.
The end result of Rubio’s proposal is very similar to the end game that the Cadillac Tax in Obamacare envisions. So, it is disingenuous for the law’s supporters to attack this component of Rubio’s proposal.
Furthermore, to claim that Rubio’s plan will result in a tax increase is simply wrong. Detractors of his proposal conveniently forget that he is offering every American a tax credit to offset the cost of health insurance.
Taken as a whole, therefore, Rubio’s health care proposal may actually result in a significant tax cut on the American people. For those who purchase health insurance on their own currently, without any tax benefits, Rubio’s credit will likely result in a tax cut — the magnitude of which will depend on the size of the tax credit.
For those who get their insurance through their employers, two interacting trends are likely to result. First, employers will begin to change the mix of plans they offer to accommodate the shift in policy and, second, employees will pick plans that will allow them to avoid paying more in taxes.
The claim that the plan will result in higher premiums is similarly misguided. In fact, Rubio’s proposal is the one policy change that will likely drive health costs down in the long-run. That’s because it will generally shift the U.S. health system away from costly and inefficient first-dollar coverage toward consumer-directed plans that carry lower premiums, higher deductibles and more closely function as true insurance rather than prepaid health care.
People will think carefully about incurring health care expenditures before doing so, a key development if we are to lower health costs in America. And many Americans will actually see their health premiums decrease (just how much, of course, is a function of the level at which Rubio’s tax credit is ultimately set).
Rubio’s other proposed reforms would also return a greater measure of choice to the health insurance marketplace, so that consumers can select between the plans that suit them best (rather than the relatively limited choices that Obamacare’s federal regulatory regime has created).
And while it’s true that Rubio’s plan will result in more Americans securing health coverage on their own rather than through an employer, businesses will still have an incentive to offer coverage because they get to deduct these benefits as business expenses — and nothing in Rubio’s plan contemplates a change to this part of the tax code.
In the coming months, we are sure to hear Obamacare’s supporters continue to engage in fearmongering and disingenuous attacks against any presidential candidate who presents ideas to replace the law.
That’s why Republicans seeking Obamacare’s repeal need to be clear about their ideas, able to describe why their proposals are better, and prepared to show how they will actually implement these policies if elected. It’s a huge challenge, but one that needs to be met if Republicans hope to win back the White House next year.
