McCain’s New Health Care Plan Delays the Tax Increase

Our guest blogger is James Kvaal, a Senior Fellow at the Center for American Progress Action Fund.

The McCain campaign has altered its health care plan again. The new plan reduces the number of families facing tax increases, but it requires deep cuts in Medicare and Medicaid and still will eventually require most middle-class families to pay higher taxes.

The original McCain plan imposed both income and payroll taxes to health benefits. The campaign never said so explicitly, but its figures for the plan’s budget cost and its impact on a typical family could not be understood any other way.

The plan would raise taxable income by about $13,000 for an average family with health benefits. That’s a hefty tax increase on the middle-class. We estimated that a typical middle-class family making $60,000 would pay $1,100 more in taxes in 2013.

The new McCain plan imposes only income taxes on health benefits, according to figures released over the weekend by McCain aide Douglas Holtz-Eakin. Without higher payroll taxes, fewer families will be socked with higher tax bills but taxpayers must pony up an additional $1.3 trillion. (Igor has more on McCain’s plan to pay for it by cutting Medicare and Medicaid.)

Some families still face an immediate tax increase under McCain’s plan; those with incomes and premiums that are higher than average are most likely to see higher taxes. Some families must pay more in premiums because they have significant health needs or live in a costly area of the country.

A middle-class family paying 25 percent in income taxes and 5 percent in state taxes would pay more under McCain’s plan right away if their premiums are more than $16,700 — which would make it a relatively costly plan but hardly the most expensive out there.

Moreover, more and more families will pay higher taxes over time. That’s because McCain’s tax credit will increase no faster than inflation (about 2 percent a year). In contrast, the new tax on health benefits will increase along with premiums (about 7 percent a year).

By 2014, a middle-class family (who is in the 25 percent tax bracket and pays average premiums) would pay $300 more in taxes. Every following year, the tax hike would get larger. By 2018, it would be more than $1,400.

The original McCain plan featured an unappealing tax increase on middle-class families. The new plan cuts Medicare and Medicaid, but it only delays — rather than eliminating — the tax increase on middle-class families.