President Opposes Expanding Health Insurance Program for Children, Supports Tax Changes that Shift Health Risks to Individuals
President Bush stated Wednesday that he opposed expanding the State Children's Health Insurance Program (SCHIP) and would rather Congress enact his proposal to create a standard deduction from federal taxes for health insurance, whether it's employer-provided or purchased in the individual health insurance market. The President's proposal, which he first announced during his State of the Union address in January, has little chance of being enacted. It is widely opposed by many in Congress because it could undermine employer-based health insurance without guaranteeing that an adequate alternative would take its place.
President's Proposal would Shift Risk onto Individuals and Families
The stated purpose of the proposal is to "even the playing field" between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. There would no longer be any incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer and employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction.
Little Effort at Practical Solutions in the White House
The President's words seemed geared towards satisfying certain ideological interests rather than finding practical solutions. He cast the issue as a choice between government intrusion in people's lives and the freedom of individuals to make choices in the market. As the Center on Budget and Policy Priorities has pointed out, most SCHIP and Medicaid recipients already choose between different private health plans that have contracted with their state and that have agreed to meet certain standards.
The President also invoked the fear that public health insurance "crowds out" private health insurance. The preeminent health economist whose work is often used to make such claims, Jonathan Gruber, has said that the public programs like SCHIP result in an increase in coverage among children who would otherwise go without health insurance and this far outweighs any "crowding out" of private insurance.
As reported in last week's Digest, one proposal being considered by Congress would pay for an SCHIP expansion with increased federal tobacco taxes.
Should Wealthy Investors Have Lower Tax Rates than the Rest of Us?
Warren Buffet attacked the federal tax preference for the rich over the middle-class Tuesday, arguing that it is an outrage that his receptionist pays a higher effective tax rate than he does. A major cause of the problem is the special low tax rate (15 percent) for capital gains and dividends, which mostly benefits the wealthy. Conservatives often argue that repealing this tax break or allowing it to expire (it currently is scheduled to expire at the end of 2010) would cause investment to dry up and lead to a loss of jobs. Unfortunately for proponents of the tax break, there has been no relationship between low capital gains tax rates and economic growth over the past 50 years. The lower rate can just as easily lead to greater inefficiency in the economy, since it can result in tax shelters that have no real economic rationale (as investments are made purely to transform ordinary income into capital gains).
Congress May Take a Small Step in the Right Direction
For those members of Congress who get a little weak-kneed at the thought of allowing the President's favorite tax cut to expire or be repealed, there are smaller steps that can be taken in this direction. For one thing, private equity fund managers making millions or even billions of dollars are taking advantage of the special capital gains rate even though they are not actually investing their own capital.
The House Ways and Means Committee is expected to hold hearings in July to consider a bill (H.R. 2834) that would close this loophole. Meanwhile, Senate Finance Committee chairman Max Baucus (D-MT) and ranking member Charles Grassley (R-IA) are sponsoring a narrower bill that would require publicly traded partnerships that get their income from investment services to pay the corporate income tax rate of 35 percent (which is what other publicly traded partnerships almost always must pay) instead of the capital gains rate they currently pay. The Finance Committee is expected to hold hearings later this summer and it is not yet clear if Baucus will add the provisions the House includes in its version relating to the taxing of the fund managers' compensation.
Citizens for Tax Justice director Robert McIntyre has recently appeared on television twice to debate this issue, once on May 7 and a second time on June 21.
Even Conservative Groups Now Say AMT Reform Should be Paid for; Grassley Still Wants to Increase the Deficit
The
Senate Finance Committee held a hearing Wednesday on the Alternative Minimum
Tax (AMT), the backstop tax for the very wealthy that will reach many Americans who are not so wealthy if it is not changed. Because the exemptions that keep most of us from paying the AMT are not indexed for inflation and were not permanently increased in any of President Bush's tax cut packages, the AMT would go from affecting 3.5 million taxpayers in 2006 to affecting 23 million this year if Congress does not act. That is very unlikely however, as Finance Chairman Max Baucus (D-MT) said during the hearing that one can assume Congress will enact a "patch," the term given to a temporary increase
in the AMT exemptions that Congress has periodically enacted over the
past several years to limit the reach of the tax.
Search for Fiscally Sound Solutions that Could Actually be Enacted
Baucus
asked a panel of witnesses to suggest "realistic" solutions, apparently meaning solutions that would offset any costs. This is important because recent proposals to repeal the AMT without replacing the revenue lost could cost well over a trillion dollars over a decade, meaning a major increase in the deficit with most of the benefits going toward the well-off. It
appears that even conservative organizations have realized that AMT reform
must be paid for. A witness at the hearing from the American Enterprise
Institute suggested reducing tax deductions to pay for reform. The normally
anti-tax Tax Foundation released a proposal Wednesday
to reform the AMT and partially simplify the tax code in a budget-neutral
way (albeit by exempting people who are quite wealthy from the AMT).
Nonetheless, the Finance Committee's ranking Republican Charles Grassley (R-IA) still argued that the AMT should be repealed without any offset because the revenues that will be generated from it were never expected. This
is factually wrong. The Bush administration in 2001 intentionally chose to
leave the AMT in place so as to make the cost of its first tax break
appear smaller (since the AMT "takes back" much of the Bush
tax cuts from people affected by it).
More Comprehensive Approach in the House
As consensus builds around the idea that any change in the AMT should be paid for, the real question becomes whether Congress should continue with temporary, expensive and poorly targeted patches or reform the AMT in a more comprehensive way. As reported in previous Digests, the House Ways and Means Committee is widely reported to be working on a plan to do just that, along with important improvements in the Child Tax Credit and the Earned Income Tax Credit. Members of the Senate Finance Committee need to take a serious look at this plan when it becomes available.
State Tax Justice News
New Jersey Budget Signed, but Long-Term Questions Remain
On Thursday, Governor Jon Corzine signed New Jersey's fiscal year 2008 budget into law, but warned that difficult times may be ahead if the state fails to address a looming structural budget deficit. But, as Jon Shure of New Jersey Policy Perspective explains in a recent op-ed, this concern didn't stop the Governor from approving a number of substantial tax cuts included in this year's budget, such as more than $2 billion in additional property tax rebates and a $275 million business tax cut. Though much smaller in cost, at roughly $36 million, the state budget contains another tax change that may be more meaningful for some working families - an expansion of New Jersey's earned income tax credit. As a result of the change, approximately 300,000 taxpayers, all of whom have incomes between $20,000 and just under $40,000 per year, will now receive the credit, while the overall value of the credit will rise from 20% of the federal credit to 25% over the next few years.
Louisiana Legislature Sends Its Good and Bad Ideas to Governor
Louisiana's 2007 legislative session came to an end yesterday. Fueled by large projected budget surpluses, lawmakers spent the session pondering all sorts of options for tax cuts, ranging from smokestack-chasing tax giveaways
to tax breaks for struggling artists. In
the end, lawmakers took an important first step towards tax fairness
by enacting a refundable Earned Income Tax Credit, thanks in part to the work of the Louisiana Budget Project. But legislators took a step backwards as well, expanding the ability of the wealthiest Louisianans to claim the same itemized deductions they took on their federal tax forms. This move is estimated to benefit only 20 percent of Louisiana families. Left to be seen is whether Governor Kathleen Blanco might veto these high-end cuts.
Cuts, Cuts, and More Cuts
Last Thursday South Carolina legislators passed a substantial tax cut package, two weeks after the legislative session was scheduled to end. Fierce disagreement between policymakers caused delays but lawmakers finally reached a compromise. Starting November 1, South Carolina visitors and residents will no longer pay a three percent sales tax on groceries. Of course, there are more targeted ways to assist low income tax payers than simply eliminating the grocery tax altogether (take a look at ITEP's policy brief). Progressives did win a defensive victory by lobbying hard against the House plan to lower income tax rates for better off South Carolinians. Instead, the state's bottom income tax rate was eliminated - a move that benefits taxpayers at all income levels.
Agreement in Michigan on How to Tax Businesses
After months of bickering, it appears that the Michigan Legislature and Governor Jennifer Granholm have reached a compromise regarding how to replace the state's Single Business Tax (SBT), which is set to expire at the end of the year. The SBT generates about $1.9 billion a year and the replacement tax is expected to raise a similar amount. The new Michigan Business Tax "would impose a 4.95% tax on business profits, plus an 0.8% tax on gross receipts minus deductions for purchases of goods and materials." But now Michigan lawmakers have more work to do as the state's looming budget crisis for the 2008 fiscal year must be resolved. In fact, Governor Granholm wrote a letter to legislators pleading with them to cancel their summer break. She said in the letter, "Vacation is not an option until our work is done." Possible avenues for closing the state's deficit may include income tax hikes or cuts in services. Stay tuned....
Presidential Candidates on the Rich and Taxes
Earlier this week, Warren Buffett made statements that he and America's richest are simply not taxed enough. Well, it's caused a big stir and has gained enough attention to be incorporated in the Presidential debate last night at Howard University. Check out CTJ's blog to see how the Democratic candidates weighed in on the issue.
