Is The McCain Health Care Plan A Massive Tax Increase?

Our guest blogger is James Kvaal, Domestic Policy Adviser at the Center for American Progress Action Fund.

bushmc.gifWe’re halfway through health care week for the McCain campaign, with speeches in five states. But one critical question remains unanswered: how does the value of the credit change over time? If it grows slower than health care costs – as does the Bush plan it was modeled on – it would be a huge tax increase over time.

Sen. McCain has proposed a massive tax shift. He would end the tax break for health benefits that workers get from their jobs – a $3.6 trillion tax increase over the next decade. Then he’d redirect those resources into new tax credits worth $5,000 per family in the first year. The change would be a tax cut for some families and a tax increase for others.

The McCain campaign has not released a lot of details, particularly for such an important proposal. But we know more about the model for the McCain plan, a very similar Bush Administration proposal. (Bush’s proposal created tax deductions, but his aides said it was equivalent to a $4,500 credit for families. Adjust for rising health costs and you basically have McCain’s plan.)

The Bush plan capped the growth of credits at the rate of inflation (expected to be about 2 percent a year). That is much slower than current tax benefits, which grow with premiums (about 6 percent a year).

For Bush, capping the growth of tax benefits has two advantages. It makes the numbers work: the plan has a large initial cost that is slowly recouped over time as the tax cut turns into a tax increase. Second, as Ezra Klein notes, it drives families into cheaper coverage that will make them pay more for health care and therefore use less of it.

But this isn’t such a good deal for families. It’s more like a Trojan Horse: a tax increase disguised as an initial tax cut. The slower growth adds up to a 30 percent cut after 10 years and a 50 percent cut after 20 years.

So here’s my question: does the McCain proposal also limit health care cost growth? If so, it will soon become a massive cut in support for families’ health coverage costs.

UPDATE: In today’s New York Times, Kevin Sack and Michael Cooper observe that McCain’s plan “would have the effect of increasing tax payments for some workers.” Sack and Cooper note that even middle-income workers with conventional coverage could pay more over time, depending on how the tax credits are adjusted for inflation.

UPDATE II: Over at Swampland, Karen Tumulty confirms with Douglas Holtz-Eakin that the tax credit’s growth is limited to the inflation rate.