Bad framing on the excise tax

Ezra Klein explains...

A lot of the arguments over the excise tax are getting caught in a bad, and even slightly dishonest, sales job from its supporters. Sen. John Kerry's blog post defending the policy, for instance, isn't playing it straight. Saying it won't tax employees is a distinction without a difference: It will tax insurers, which will add the tax into the cost of their plans, and employers will either choose different plans or pass the cost on to employees. Similarly, saying it will affect only "3% of premiums in 2013" is designed to obscure the fact that it will hit a lot more policies in 2020. But this is one of those cases when bad arguments mask a good policy, rather than the other way around.

Health benefits should be taxed. There's no reason the system should make a dollar in employer-provided health insurance worth more than a dollar in wages. That's a straight incentive for employers to spend more and more on health insurance, which is contrary to the needs of the country right now. The excise tax begins to expose a small portion of employer-provided health-care costs to taxes. Meanwhile, someone who doesn't get employer-provided health care and buys their own insurance is getting taxed on every dollar they spend on health care.

No one defends this system in principle. They only defend it in practice. The excise tax has its opponents, but none of them say we should make food, or broadband Internet, tax free as long as it is provided by employers -- even though those things are also important! You don't even hear them demanding that the bill make non-employer-provided health care tax free. No one, in other words, is interested in expanding this system to other sectors, or even to the rest of the health-care sector. But given that this subsidy is worth about $250 billion a year, it's got a lot of defenders.

As a final note, the excise tax is a substitute for simply capping the employer tax exclusion. The swap came about because the politics of the excise tax are superficially better: Rather than taxing "workers" or "businesses," you're taxing "insurers." But insurers pass the cost along, of course. And the excise tax is more regressive than capping the exclusion. If you cap the exclusion, people get taxed at their normal marginal tax rate, which is virtually nothing for low-income workers. The excise tax, by contrast, is a flat surtax of 40 percent, no matter what your income. in this case, making the tax sound more populist also made it substantially more regressive.