Wait a Minute–We’re Paying for Health Reform with Another AMT?
November 2nd, 2009 . by economistmomIt took me awhile to catch onto this (I guess real life got in the way of reading the legislation or even the revenue estimate carefully), but the House health care reform bill not only fails to provide a revenue source that will keep up with rising health costs (and thus is less likely to stay deficit-neutral beyond the first ten years), but it relies on a revenue source that’s likely to fall short of even that tax’s own standards. Why? Because it’s a surtax on the highest-income households (of 5.4% on income over $500K for singles and $1 million for couples)…and is NOT indexed for inflation. Sound familiar? It should, because this is how the current-law “alternative minimum tax” (AMT) is supposed to work as well: a tax on rich people that over time digs deeper down into the income distribution as inflation reduces the real value of the unindexed exemption level. Now, in the case of the AMT there’s been this interaction with the ordinary income tax that also pushes more people onto the AMT whenever there’s a big cut in the ordinary income tax (for rich people) that doesn’t coincide with a matching adjustment to the AMT’s specification.
In CBO’s analysis of the House bill, they suggest that if all the policies in the bill are carried out as written, the bill is likely to stay deficit neutral even beyond the first ten years–because the tough choices on Medicare and Medicaid spending will produce savings that will grow more rapidly (10-15 percent per year) than the costs of expanded coverage will (8 percent per year), so that even though the growth in surtax revenue (at 5 percent per year) will fall short of the growth in the costs of expanded coverage, on net the cost-saving and revenue-raising provisions combined will keep pace with the cost-increasing provisions. (Here’s a link to the revenue estimate by the Joint Committee on Taxation that feeds into the CBO analysis.) As CBO summarizes, with those assumptions (emphasis added):
CBO expects that the legislation [as written] would slightly reduce federal budget deficits in that [second] decade relative to those projected under current law—with a total effect during that decade that is in a broad range between zero and one-quarter percent of GDP. The imprecision of that calculation reflects the even greater degree of uncertainty that attends to it, compared with CBO’s 10-year budget estimates, and the effects of the bill could fall outside of that range.
I add “as written” after “the legislation,” because legislation often fails to be carried out as written. Exhibit A: the “sustainable growth rate” in Medicare physician payments that year after year is overridden by the so-called “doc fix”–preventing scheduled (in law) cost savings in Medicare from materializing. Exhibit B: revenue from the AMT, which under current law would keep rising year after year as long as there is inflation, but which Congress overrides year after year by passing “AMT relief.” Both exhibits have deficit financing in common, which means that year after year Congress (with the prior and now current Administration’s support) makes sure that what was supposed to reduce the deficit actually increases it.
CBO’s judgment that the House bill will remain deficit neutral beyond the first ten years (and even within the first ten years) relies on a reversal of practice on both the old “Exhibit A”–because the “doc fix” is not included in the bill and so is effectively assumed not to happen–and the new “Exhibit B”–because this new, unindexed surtax on the rich is suspiciously like the existing AMT.
So forgive me if I don’t believe the House health reform bill will actually save us money, no matter what it says it will do “in law.” Congress and the Administration(s) are in the bad habit of not practicing what they preach–uh, pass.
UPDATE (Tues. 1 pm): The Tax Policy Center’s Howard Gleckman beat me to the “hunch”–that nagging feeling like this surtax is the latest “AMT.” See Howard’s Friday morning(!) post on the TPC blog, TaxVox. And here is an AP story that quotes similar worries from TPC’s Bill Gale.
Diane,
I wholeheartedly agree with your assessment of the house bill (by the way you forgot to mention the Medicare cuts which also won’t happen in fact).
As I said to Brooks in an earlier post, the whole notion of CBO scoring (now that people are paying attention) has got to go. We should have CBO score costs over X years (10, 20 I don’t care really). On the revenue side, we should only count revenues that are a sole consequence of the bill (e.g., permit auctions in cap and trade). Nothing else should count because arguably, that money is completely fungible and “fully funded” is the same as saying “fully capable of sustaining trillion dollar deficits forever.”
Said differently, the best case for health care reform is instead of reducing the deficit from the baseline of roughly $9 trillion over 10 years to 8 trillion over the same time, we’ll leave it an $9 trillion. By the way, that assumes all of the issues you identify on the revenue side. My way is just as true as the current posturing in Congress but theirs sounds better.
P.S. You forgot to mention benefit and cost timing as another way to “game” the CBO scoring system
Diane,
Good points, and I’ll once again beat my dead horse by pointing out the largely bogus nature of the concept of “offsets” and resulting ostensible “deficit-neutrality” — even if we were to assume, just arguendo, that the law will be implemented as written.
To dig up one of my past analogies, it’s like we have a friend, Joe, who is obese and, per his current habits and gap between calories consumed and calories burned, will continue to get increasingly obese and eventually die a premature death. Joe clearly must cut down from 4 meals a day to 3, and start working out 4 days per week. Both of these changes will be extremely difficult for Joe, but if he is to avert disaster, he must make these changes, and the longer he waits, the greater the risk of disaster and the greater the ultimate sacrifice he’ll have to make (having to cut back even more on consumption and work out even more, along with more physical pain, which will also make the working out more difficult). So Joe realizes that he must make this sacrifice of less consumption and more exercise.
But then Joe calls me, and the following dialogue transpires.
Joe: I’m going to add a late night snack to to my daily consumption. But don’t worry, I’m going to “offset” it — every Saturday I’m going to work out and eat only 3 meals instead of 4. So adding the late night snack every evening is “weight-neutral”.
Me: But Joe, even leaving aside my doubts that you’ll actually get to the gym once a week, you have to do that meal reduction (and much more) and that exercise (and much more) ANYWAY, to address the problem you already have! In other words, that exercise and meal-reduction is a given. The main thing you’re doing now is introducing the element of the late night snack every evening. The best that can be said about these changes you’re labeling “offsets” is that, IF you actually implement them right away and maintain them, it might mean doing them a bit sooner rather than later, but you really shouldn’t pretend that making sacrifices that you have to make anyway (and which sooner or later you’ll be forced to make) and labeling them “offsets” really means that they offset the calories of your late night snacks every night and makes the whole set of changes “weight-neutral” in a meaningful sense. Mainly what’s happening is that the degree to which working out and skipping a meal on Friday would mitigate your problem is being truly offset by your incremental consumption (the late night snack), leaving you with the need to work out even more and skip even more meals than you otherwise would, and I remind you that you’ve long avoided even the degree of such sacrifice that’s required without adding even more of a burden.
Joe: Well, um, it’s, er, fully offset. Ya’ know, weight-neutral. Just look at the numbers that show it.
California’s 1% surtax on high incomes is similarly not indexed for inflation. After inflation triples prices of everything, some very middle class people who sell their homes will be paying that tax, and the federal surtax as well.
“Revenue neutral’ is confusing. The program insures millions of additional people. So, where will the cost savings come from? Less money to doctors, nurses and hospitals?