Improving the Excise Tax

Internal Revenue Service Building (cc photo by scotteric)

Internal Revenue Service Building (cc photo by scotteric)

If the House leadership wants to get a health care bill to the president’s desk, they’re going to have to give way in conference on most points to the senate. But one issue that’s sure to be controversial with House Democrats is the so-called “excise tax” on unusually expensive health insurance plans. The basic idea of the tax is sound—it finances expansion of health insurance coverage without transferring large net resources to the health care industry, and over time it will help ensure that any growth in heath spending as a share of the economy is driven by real consumer demand and not just tax subsidies. That said, the precise way you implement this is going to make a lot of difference to people in the short-run, and Henry Aaron’s proposed modification here could take care of a legitimate issue:

Third, I would base the tax on high-cost plans not on each company’s actual cost, but on the cost of each company’s plan as applied to a population of standardized age distribution. Actuaries can do such calculations quite readily. Such a tax would get at what really should be taxed—unduly generous plans—not plans that are high cost only because they apply to a particularly old population.

That should make the tax more palatable to some of the industrial unions, who tends to have very unfavorable age structures in their plans, and thus address a concern that many House Democrats have. And I see no good reason for Senate centrists to object to the switch.