Tuesday, November 24, 2009

The cynical time bomb in Reid's bill

e21 has a very perceptive post about the Medicare payroll tax that Harry Reid has inserted into his bill to pay for his health care proposal.

The Democrats are double-counting the money raised from the tax. They're counting it to reduce the coming deficit in Medicare and they're also counting it to help pay for the present bill.
Revenues from the HI tax are “deposited” in the Medicare Part A Trust Fund, which is running a $20.5 billion deficit (p. 56 of pdf) in 2009. The Trust Fund is expected to continue to hemorrhage money for the next seven years until 2017 when it is expected to be bankrupt. Should Congress elect to keep the program running beyond this date (a safe assumption), the cost to the rest of the budget is estimated to be over $13 trillion in present value. This is the money Congress would need to invest today to keep Medicare Part A solvent over the 75 year window. And this figure does not include the additional funds that would be necessary to close the even more gaping holes in the other parts of Medicare, principally Part B (doctors’ visits) and Part D (prescription drug coverage), which are actually several times larger than the Part A deficit.

Senate Democrats propose raising the HI tax rate by 0.5% to 3.4% on wages in excess of $200,000 ($250,000 for joint filers) beginning in 2013. The Joint Committee on Taxation estimates this tax increase will raise $54 billion over ten years. Given the scale of the Medicare funding deficit, some might argue that these additional HI revenues are necessary. But this is not what Democrats propose; this $54 billion would be used to finance entirely new health insurance subsidies for non-Medicare beneficiaries. The money just gets counted as though it’s deposited in the Medicare Trust Fund because the tax is deducted as part of the FICA line item on a worker’s paycheck.
This is the kind of devious trick that only government planners can get away with.
While the person who devised this scheme has no doubt received hearty congratulations from the rest of the Senate Democratic caucus, the cynicism embedded in this strategy is breathtaking. Each dollar raised from the tax increase gets counted by the Joint Committee on Taxation as offsetting new health spending at the same time that very same dollar is treated by the Medicare Actuaries as being deposited in the Medicare Trust Fund. But if this sort of double counting is such a good idea, why stop at $54 billion? Why not pay for the entire health care reform bill through HI tax increases that also extend the solvency of the HI trust fund?
This is coming to be called the Medicare AMT because the Democrats have deliberately not indexed it to inflation so more and more people will be sucked into paying the tax every year. There is no way that the Democrats don't understand what they're doing - they've had years of trying to find ways to ameliorate the burden of the AMT as it sucks in more and more middle class taxpayers.
The proposed HI tax increase is not indexed for inflation. This means that as inflation pushes up household income, more and more families will be subjected to the tax even though their standard of living remains the same. If you don’t think this is a problem, consider the lengths Congress must go each year to extend the so-called “patch” that ensures more households are not subjected to the Alternative Minimum Tax (AMT).

Originally designed for the same households now targeted by the Democrats’ HI tax increase, the AMT was never indexed to inflation because the costs of doing so were too high given all of the revenue it was expected to generate from “bracket creep.” As a result, exemption levels that once seemed sufficiently high to exclude all but the richest households would now ensnare over 21 million middle class households absent the annual inflation patch. The same would be true of the new HI tax increase, as families living in high-cost states, struggling to pay their bills, suddenly find themselves subjected to another tax ostensibly designed for someone in a far different circumstance. And, once enacted, repealing the tax would be “too expensive” given that it would be expected to apply to most of the population over the long-run projection window.

Health care reform is a serious topic that deserves serious attention. Yet, when the time came to rise to this occasion, Senate Democrats respond with a bill that exploits a trust fund accounting loophole and creates a “new AMT” imbroglio that future Congresses will have to sort out. Needless to say, this is an inauspicious start to the formal consideration of such a monumental piece of legislation.
Add in the sorts of gimmicks that have been used in this bill so that Reid can sanctimoniously get up on the Senate floor and say with a straight face how this plan is budget-neutral. He just hopes that people don't understand about how the bill has ten years of taxes for five years of benefits and how it just assumes that billions of dollars of cuts will be made in Medicare by some anonymously courageous legislators some time in the future. Of course, that will never happen. And just as people today look back on the framers of the AMT and wonder what they were thinking, people will look back on this bill and wonder what they thought they were doing. But by then it will be too late and we'll be stuck with all that happens when these gimmicks are exposed for the empty tricks they are and we have to actually pay the bills.