This American Life Doesn’t Understand This American Government

The most recent episode of NPR’s “This American Life” continues a line of liberal laments that the legislative process does not work, and blames most of that ineffectiveness on a single source: Donald Trump. (Shocker there.)

But the idea of removing Trump to Make Congress Great Again doesn’t hold up to scrutiny. Even if it did, such a development would not comport with the Framers’ design of our government, which put the “deliberative” in “deliberative process” far more than the modern-day Left would prefer.

“This American Life” correspondent Zoe Chace laments that the popularity of DACA—which covers individuals brought to the United States illegally as children—has impeded its enactment into law. She thinks lawmakers have used its popularity

as a spoonful of sugar to make tougher immigration measures easier to swallow—stuff like border security, restricting visas, or on the Democrat side, legalizing even more immigrants. That’s the curse of DACA. The most valuable thing about it, on Capitol Hill anyway, is the possibility that it could be used to pass other stuff. So even though we’re a democracy, even though 80% of the country wants DACA, the country doesn’t get what it wants because there’s no incentive for Congress to just put it to a straight up or down vote.

Having castigated Congress for using DACA “to pass other stuff,” Chace spends much of the episode highlighting Flake’s attempts to use “other stuff”—namely, tax reform—to pass DACA.

Looks Can Be Deceiving

Chace calls Flake “the most powerful senator in Congress right now.” Having announced his retirement, Flake has no political constituency to appease. That dynamic, combined with the current Senate split of 50 Republicans and 49 Democrats—Republican John McCain is recovering from cancer treatment in his home state of Arizona—at first blush gives Flake significant leverage.

Second, to pass the Senate, DACA requires not 50 votes, but 60, as most legislation needs a three-fifths majority to overcome a potential filibuster. The tax legislation, enacted under special budget reconciliation procedures, stands as an exception that proves the general rule that would apply to any DACA bill.

Third, by favorably viewing Flake’s attempt (which he privately admits to Chace is a bluff) to tie his tax reform vote to a commitment from leadership to take up DACA legislation, Chace supports the very problem she criticizes—namely, lawmakers using one bill or issue to “pass other stuff.”

Chace’s criticism of the legislative process therefore comes across as inherently self-serving. She doesn’t object to senators using unrelated matters as leverage. For example, she applauds Flake for threatening to hijack the tax bill over immigration, so much as she objects to senators using other matters as leverage on her issue: passing DACA. That double standard, coupled with an ignorance of basic constitutional principles, leads to some naïve misunderstandings.

Let’s Review Some of Those

That principle leads to the “other stuff” dynamic Chace described, because lawmakers have other competing priorities to navigate. Some might support DACA, but only if they receive something they perceive as more valuable in exchange—border security, for instance, or a broader immigration deal.

Occasionally lawmakers take this concept too far, but the system tends to self-correct. As the episode notes, Democrats’ tactics led to a partial government shutdown in January, as Senate Democrats refused to pass spending bills keeping the federal government operating unless Republicans committed to enact a DACA measure with it—“other stuff,” in other words.

But although most Democrats support DACA, they divided over the hardball, hostage-taking tactics that tied passing spending bills to enacting an immigration measure. That division and public pressure over the shutdown led them to beat a hasty retreat.

In 2007, under President George W. Bush an immigration bill famously failed on the Senate floor, in part because then-senator Obama and other liberals voted to restrict the number of guest workers permitted into the United States—a key provision necessary to win Republican votes.

Consider a Case Study in Virginia

To view the immigration debate in a nutshell, one need look no further than Rep. Eric Cantor (R-VA). Or, to be more precise, former Rep. Eric Cantor. In June 2014, Cantor lost his Republican primary to an upstart challenger in Dave Brat. Outrage over the possibility that the House might pass an immigration bill the Senate’s “Gang of Eight” muscled through in 2013 helped Cantor go down to primary defeat, and ended any debate on immigration in the 113th Congress (again, well before most people thought Trump would run for president, let alone win).

The way Cantor’s 2014 defeat changed the landscape on immigration in Congress illustrates that, while not a direct democracy, the American system remains responsive to democratic principles, even if they resulted in an outcome (i.e., inaction on immigration) Chace would decry. Chace might argue that a June primary election where only 65,017 Virginia residents voted—only about one-sixth the number who voted in that district’s November 2016 general election—should not determine the fate of immigration legislation nationwide.

But by making it difficult to enact legislation, the American system of government accounts for intensity of opinion as well as breadth of opinion. In the case of Cantor, a group of 36,105 Virginia residents who voted for Brat—many of whom cared strongly about stopping an immigration bill—sent a message on behalf of the hundreds of thousands of Virginia residents who didn’t care enough to vote in the Republican primary election. (Virginia conducts open primaries, in which voters can choose either party’s ballot, so any resident could have voted for or against Cantor in the Republican primary.)

That outcome might resonate with a former resident of Cantor’s district, Virginia’s own James Madison. In Federalist 10, Madison wrote of how a geographically diverse country would make it difficult for any one faction to command a majority, and impose its will on others. In Federalist 51, Madison returned to the topic of limiting government’s power by separating its responsibilities among co-equal branches: “Ambition must be made to counteract ambition.”

The stalemate on immigration and DACA would likely prove quite satisfactory to Framers like Madison, who feared government’s powers and purposefully looked to circumscribe them. To the modern Left, however, a constitutional government with limited authority seems an antiquated and inconvenient trifle.

‘Slow Government’ Complaints Are Way Older than Trump

Although Chace’s report claims that congressional dysfunction “has changed in ways that are very specific to Donald Trump,” liberals have criticized government inaction for decades. In “The System: The American Way of Politics at the Breaking Point,” Haynes Johnson and David Broder use their seminal analysis of the rise and fall of “HillaryCare” to decry a Washington “incapable as a nation of addressing the major long-term problems facing the society:”

At no point, we believe, has the cumulative assault on the idea of responsible government been so destructive of the very faith in the democratic system as now. A thoroughly cynical society, deeply distrustful of its institutions and leaders and the reliability of information it receives, is a society in peril of breaking apart.

Again, these words far precede any Trump administration. Broder and Johnson wrote them in 1996, while the tycoon looked to rebuild his empire following several corporate bankruptcies.

As “This American Life” notes, Trump has proved more indecisive legislatively than most presidents did. The episode highlights how Trump went from supporting any immigration bill Congress would send him to imposing major new conditions on same in the matter of hours. That series of events illustrated but one of Trump’s many reverses on legislation.

For instance, Trump famously called the American Health Care Act “mean” in a closed-door meeting weeks after Republican representatives voted to approve the legislation, and Trump publicly praised them for doing so. But presidents prior to Trump have also engaged in legislative U-turns or ill-conceived maneuvers.

In his 1994 State of the Union message, Bill Clinton threatened to veto any health-care bill that did not achieve universal coverage. As Johnson and Broder recount, that was a major tactical mistake that Clinton later attempted to undo, but ultimately contributed to the downfall of “HillaryCare.” And of course, Clinton himself might not have become president had his predecessor, George H.W. Bush, not made then violated his infamous “Read my lips—no new taxes!” pledge—the “six most destructive words in the history of presidential politics.”

While Trump undoubtedly has introduced more foibles into the legislative process, he has not changed its fundamental dynamic—a dynamic “This American Life” criticizes yet does not understand. Chace says “we’re a democracy,” but she means that she wants a Democratic—capital “D”—form of government, one in which Congress passes lots of legislation, enacts big programs (more funding for NPR, anyone?), and plays a major role in the lives of the American people.

Yet Madison and the Constitution’s Framers deliberately designed a lower-case “r” republican form of government, one with limited powers and a deliberative process designed to make enacting major legislation difficult. That reality might not suit the liberal dreams of “This American Life,” but it represents how American democratic principles actually live and work.

This post was originally published at The Federalist.

Mixed Messages on Paul Ryan’s Entitlement Record

Upon news of House Speaker Paul Ryan’s retirement Wednesday, liberals knew to attack him, but didn’t know exactly why. Liberal Politico columnist Michael Grunwald skewered Ryan’s hypocrisy on fiscal discipline:

Ryan’s support for higher spending has not been limited to defense and homeland security. He supported Bush’s expansion of prescription drug benefits, as well as the auto bailout and Wall Street bailout during the financial crisis…Ryan does talk a lot about reining in Medicaid, Medicare, and Social Security, for which he’s routinely praised as a courageous truth-teller. But he’s never actually made entitlement reform happen. Congress did pass one law during his tenure that reduced Medicare spending by more than $700 billion, but that law was Obamacare, and Ryan bitterly opposed it.

For the record, Ryan opposed Obamacare because, as he repeatedly noted during the 2012 campaign, the law “raided” Medicare to pay for Obamacare. (Kathleen Sebelius, a member of President Obama’s cabinet, admitted the law used Medicare spending reductions to both “save Medicare” and “fund health care reform.”)

Compare that with a Vox article, titled “Paul Ryan’s Most Important Legacy is Trump’s War on Medicaid”: “[Paul] Ryan’s dreams are alive and well. Through work requirements and other restrictions, President Donald Trump could eventually oversee the most significant rollback of Medicaid benefits in the program’s 50-year history.” It goes on to talk about how the administration “is carrying on Ryan’s Medicaid-gutting agenda.”

Which is it? On fiscal discipline, is Ryan an incompetent hypocrite, or a slash-and-burn maniac throwing poor people out on the streets? As in most cases, reality contains nuance. Several caveats are in order.

First, Ryan’s budgets always contained “magic asterisks.” As the Los Angeles Times noted in 2012, “the budget resolutions he wrote would have left that Medicare ‘raid’ in place”—because Republicans could only achieve the political goal of a balanced budget within ten years by retaining Obamacare’s tax increases and Medicare reductions.” The budgets generally repealed the Obamacare entitlements, thus allowing the Medicare reductions to bolster that program rather than financing Obamacare. The budgets served as messaging documents, but generally lacked many of the critical details to transform them from visions into actual policy.

Second, to the best of my recollections, Ryan never took on the leadership of his party on a major policy issue. Former GOP House Speaker John Boehner famously never requested an earmark during a quarter-century in Congress. Sen. John McCain’s “Maverick” image came from his fight against fellow Republicans on campaign finance reform.

But whether as a backbencher or a committee chair, Ryan rarely bucked the party line. That meant voting for the Bush administration’s big-spending bills like the Medicare Modernization Act and TARP—both of which the current vice president, Mike Pence, voted against while a backbench member of Congress.

Third, particularly under this president, Republicans do not want to reform entitlements. As I noted during the 2016 election, neither presidential candidate made an issue of entitlement reform, or Medicare’s impending insolvency. In fact, both went out of their way to avoid the issue. Any House speaker would have difficulty convincing this president to embrace substantive entitlement reforms.

In general, one can argue that, contrary to his image as a leader on fiscal issues, Ryan too readily followed. Other Republicans would support his austere budgets, which never had the force of law, but he would support their big-spending bills, many of which made it to the statute books.

On one issue, however, Ryan did lead—and in the worst possible way. As I wrote last fall, Ryan brought to the House floor legislation repealing Obamacare’s cap on Medicare spending. This past February, that repeal became law.

Ryan could have sought to retain that cap while discarding the unelected, unaccountable board Obamacare created to enforce it. As a result, Ryan’s “legacy” on entitlement reform will consist of his role as the first speaker to repeal a cap on entitlement spending.

Primum non nocere—first, do no harm. Ryan may not have had the power to compel Republicans to reform entitlements, but he did have the power—if he had had the courage—to prevent his own party from making the problem any worse. He did not.

This post was originally published at The Federalist.

Paul Ryan and “Regular Order”

Last week, Politico published an article talking about how the Republican House of Representatives under Paul Ryan’s speakership set a new record for the number of bills approved under closed rules—which prohibit members of Congress from offering amendments. Although the Politico story didn’t use the term, it echoes the complaints of Sen. John McCain (R-AZ) surrounding Obamacare “repeal-and-replace” legislation this past summer: “I want the regular order.”

McCain’s comment invites a question: What exactly constitutes “the regular order” in Congress? Why do people keep calling for it? And if so many people keep calling for it, why doesn’t Congress just restore “the regular order” already?

‘Deem-and-Pass’

Politico quoted House Rules Committee Ranking Member Louise Slaughter (D-NY): “Under Speaker Ryan’s leadership, this session of Congress has now become the most closed Congress in history.” To call Slaughter’s complaints about a closed process ironic would put it mildly.

Seven years ago, when she chaired the Rules Committee, Slaughter proposed having the Democratic House enact Obamacare into law without voting on it. The House could merely “deem” Obamacare approved as a result of passing some other measure.

While the House has repeatedly used this “deem-and-pass” strategy under both Republican and Democratic majorities, the optics of passing such a massive and prominent piece of legislation using such dodgy procedural shortcuts led Democrats to abandon the gambit, but not before conservative bloggers noted that Slaughter, Rep. Steny Hoyer (D-MD), and others attacked the “deem-and-pass” maneuver when Republicans controlled the House in the 2000s.

Republican Manipulation

In proposing the “deem-and-pass” strategy, Slaughter looked to protect House Democrats from taking a tough vote on the unpopular health-care bill Senate Democrats approved on Christmas Eve 2009—the one with the “Cornhusker Kickback,” “Gator Aid,” “Louisiana Purchase,” and the other backroom deals that made the legislation toxic in the minds of many. When in the majority themselves, Republicans have used the same tactics, using procedural blocks to avoid politically difficult votes.

In 2015, the appropriations process ground to a halt in mid-summer, when Democrats offered an amendment preventing federal funds from being used to display the Confederate flag in national cemeteries. The amendment, offered by Rep. Jared Huffman (D-CA), originally passed by voice vote, but some Republicans pledged to vote against the bill if the amendment remained in it.

Republican leaders didn’t have the votes to strip out the amendment, and didn’t have the votes to pass the bill with the amendment in, so the Interior appropriations bill got shelved—as did the entire appropriations process, because Republicans feared Democrats would offer Confederate flag-related amendments to any spending bill that came to the House floor.

House Freedom Caucus

Yet on several occasions over the past few years—including the Confederate flag flap—conservatives and HFC members have looked to leadership to squelch debate on amendments. Earlier this year, moderate Republicans and Democrats combined to defeat an amendment that would have prohibited federal funding of soldiers’ gender-reassignment surgery. Conservatives responded a few weeks later by demanding that leadership insert such a funding prohibition into the defense spending bill—without a direct vote, via the “deem-and-pass” strategy—even though the provision would have violated the will of the House as expressed in a vote weeks before.

While the executive ultimately decided the transgender issue—at conservatives’ behest, President Trump issued an executive order prohibiting transgender troops from serving, making the House procedural dispute moot—it illustrates the problems inherent with a move to “regular order.” As with Slaughter and Democrats, conservatives support an open process in the House only up until the point when it detracts from their desired policy outcomes, at which point the legislative process quickly devolves into a game of ends justifying means.

If it wanted to, HFC could easily demand a more open floor process out of Ryan. It could vote down the rules governing floor debate on individual bills unless and until the Republican leadership allowed an open process and more amendment votes, at which point the Republican leadership would have no choice but to acquiesce to pass legislation through the House. However, a more open process would require conservatives to accept policy outcomes they might not like—federal funds being spent on gender-reassignment surgeries, for instance.

These strictures require leadership to use all manner of procedural shortcuts and chicanery to cobble together legislation that can command a majority of votes. It’s no way to run a railroad. But until members’ desires for “the regular order” are strong enough that they will vote down bills on process grounds alone, it will remain the way Washington works—or, in many cases, doesn’t.

This post was originally published at The Federalist.

Four Questions about the Alexander-Murray Bill

Upon its unveiling last week, the health insurance “stabilization” measure drafted by Senate Health, Education, Labor, and Pensions Committee Chairman Lamar Alexander (R-TN) and Ranking Member Patty Murray (D-WA) received praise from some lawmakers. For instance, Sen. John McCain (R-AZ) stated that “health care reform ought to be the product of regular order in the Senate, and the bill [the sponsors] introduced today is an important step towards that end.”

Unfortunately, the process to date has not resembled the “regular order” its sponsors have claimed. Drafted behind closed doors, by staff for a committee with only partial jurisdiction over health care, the bill’s provisions remained in flux as of last week. Moreover, the bill apparently will not undergo a mark-up or other committee action before the bill is either considered on the Senate floor—or, as some have speculated, “air-dropped” into a massive catch-all spending bill, where it will receive little to no legislative scrutiny.

Why didn’t Alexander know his bill provided taxpayer funding of abortion coverage?

Following my article last week highlighting how the cost-sharing reduction payments appropriated in the legislation would represent taxpayer funding of plans that cover abortion, a reporter for the Catholic-run Eternal Word Television Network interviewed senators Alexander and Murray (along with myself) about the issue.

Alexander told reporter Jason Calvi that he “hadn’t discussed” the life issue with staff, indicating he had little inkling of the effects of the legislation he sponsored:

Alexander then claimed that “I’m sure the president will address” the abortion funding issue. But executive action—which a future president can always rescind—is no substitute for legislative language. The pro-life community derided President Obama’s executive order designed to segregate abortion payments and federal funding as an accounting sham.

As I wrote in June, Republican leaders—including Senate leader Mitch McConnell (R-KY), and Mike Pence, the current vice president—clearly noted during debates on Obamacare that the law would provide for taxpayer funding of abortion coverage. The Alexander-Murray bill would do likewise unless and until the legislation includes an explicit ban on abortion funding.

Who inserted the earmark for Minnesota into the legislation?

Call it the “Klobuchar Kickback,” call it the “Golden Gopher Giveaway,” but Section 2(b) of the bill contains provisions relevant only to Minnesota. Specifically, that provision would allow a state’s basic health program—which states can establish for individuals with incomes between 133 and 200 percent of the federally defined poverty level—to receive “pass-through” block grant funding under a waiver.

Currently, only New York and Minnesota have implemented basic health programs, and of those two states, only Minnesota has also sought a state innovation waiver under Obamacare. Last month, the federal Centers for Medicare and Medicaid Services (CMS), in approving Minnesota’s application for an innovation waiver, said it could not allow the state to receive “pass through” funds equal to spending on the basic health program, because the statute did not permit such an arrangement. The Alexander-Murray bill would explicitly permit basic health program spending to qualify for the “pass through” arrangement, allowing Minnesota—the only state with such an arrangement—to benefit.

Will a committee mark up the Alexander-Murray bill?

Alexander notably demurred on this topic when asked last week. One reason: As Politico has noted, it remains unclear whether or the extent to which Alexander’s committee has jurisdiction over the legislation he wrote. Revisions to the Obamacare state innovation waiver process comprise roughly half of the 26-page bill, yet the Senate HELP Committee shares jurisdiction over those matters with the Senate Finance Committee, whose chairman has derided legislation giving cost-sharing payments to insurers as a “bailout.”

Even as he praised the Alexander-Murray bill as a return to “regular order,” McCain—himself a committee chairman—doubtless would take issue with another committee “poaching” the Senate Armed Services panel’s jurisdiction, or failing to hold a mark-up entirely. Yet the process regarding the Alexander-Murray bill could include two noteworthy legislative “shortcuts”—which some may view as a deviation from “regular order.”

Are HELP Committee staff still re-writing the legislation?

A close review of the documents indicates that HELP Committee staff made changes to the bill even after Alexander and Murray announced their agreement last Tuesday. The version of the bill obtained by Axios and released last Tuesday evening—version TAM17J75, per the notation made in the top left corner of the bill text by the Office of Legislative Counsel—differs from the version (TAM17K02) publicly released by the HELP Committee on Thursday.

The revisions to the legislation, coupled with Alexander’s apparent lack of understanding regarding its implications, raise questions about what other “surprises” may lurk within its contents. For all the justifiable complaints regarding the lack of transparency over Republicans’ “repeal-and-replace” legislation earlier this year, the process surrounding Alexander-Murray seems little changed—and far from “regular order.”

This post was originally published at The Federalist.

A Status Update on Health Care

The past week’s debate on health care has seen more twists and turns than a dime-store movie novel. “Repeal-and-replace” is dead—then alive again. President Trump calls for outright repeal, then letting the law fail, then “repeal-and-replace” again.

As Vince Lombardi might ask, “What the h— is going on out here???”

Never fear. Three simple facts will put the debate in context.

Leadership Is Buying Moderates for ‘Repeal-and-Replace’

Whether in the form of “candy,” “making it rain,” or old-fashioned carve-outs that help states with reluctant senators, Senate leaders are trying to figure out the amount and type of money and incentives that will win enough moderate votes to pass a “repeal-and-replace” bill. Details remain sketchy, but the broader outline is clear: senators don’t want to vote for provisions they approved 18 months ago—when they knew President Obama would veto a repeal measure. And Senate leadership hopes to “solve” this problem essentially by throwing money at it—through new funding for Medicaid expansion states, opioid funding, bailout funds for insurers, programmatic carve-outs for some states, or all of the above (likely all of the above).

Leadership Isn’t Serious about Repeal-Only

Some observers (not to mention some senators) are confused about whether the Senate will vote on a repeal-only measure, or a “repeal-and-replace” bill. But Senate Majority Whip John Cornyn (R-TX) explained leadership’s strategy to Bloomberg Wednesday: “There’s more optimism that we could vote on a repeal-and-replace bill, rather than just a repeal bill….But if there’s no agreement then we’ll still vote on the motion to proceed” to a repeal-only measure” (emphasis mine).

Translation: Senate leadership will only move to a vote on the 2015 repeal bill—which some conservative groups have argued for—if it knows it will fail. In fact, some observers have gone so far as to suggest Majority Leader Mitch McConnell’s Monday announcement that the Senate would vote on a repeal-only bill amounted to an attempt to bait-and-switch conservatives—convincing them to support starting debate on the bill by dangling repeal-only in front of them, only to pivot back to “repeal-and-replace” once the debate began.

Regardless of McConnell’s intentions earlier in the week, Cornyn’s comments make clear the extent to which Senate leaders take a repeal-only bill seriously: They don’t.

McCain May Make It Moot

It may sound impolitic or callous to translate a war hero’s struggle against cancer into crass political terms, but if the recent cancer diagnosis of Sen. John McCain (R-AZ) means the senator will be unable to travel to Washington, Republican leaders’ desperate attempts to cobble together a legislative compromise may ultimately prove moot. At least two conservative senators oppose the current bill from the Right; adding more money to appease moderates won’t reduce those numbers, and may increase them. And at least two moderate senators oppose the current bill from the Left, hence the effort to increase funding.

If McCain is unable to vote on the legislation, Republican leaders will be able to withstand only one defection before putting the bill’s passage in jeopardy—yet at least two senators on either side of the Republican Conference oppose the current bill. That math just doesn’t add up, which means that barring some unforeseen development, the hue and cry of the past several days may ultimately amount to very little.

This post was originally published at The Federalist.

Liberals’ Agenda: Tax Health Benefits to Fund Corporate Welfare

feature article in Sunday’s Washington Post provided the latest summary of Obamacare’s woes: Premiums set to spike dramatically, insurers leaving in droves, and millions of Americans held hostage to a lengthening comedy of errors. But liberals stand ready with their answer: More of the same government taxes and spending that created the problem in the first place. To wit, the Left would tax Americans’ employer-provided health benefits to fund a permanent bailout fund for insurance companies.

In a brief released earlier this month, the liberal Robert Wood Johnson Foundation had several possible “solutions” to solve the problem of low enrollment, and low insurer participation, in Obamacare’s health insurance exchanges. In the document, the foundation suggested making program of reinsurance now scheduled to expire at year’s end permanent:

Extending [Obamacare’s] reinsurance program and its mechanism of financing would more likely have a stabilizing influence [on insurers]. The program could be authorized permanently…or for a set period of time, with authority for CMS [the Centers for Medicare and Medicaid Services] to continue it if needed….Funds for the reinsurance pool would need to be, as they are currently, collected from individual market insurers, group market insurers, and self-funded plans.

In other words, individuals who do not purchase coverage from an exchange should have their benefits taxed, to fund more corporate welfare subsidies to health insurers, in the hopes that they will continue to offer exchange coverage.
That was the basic premise of the law’s reinsurance mechanism. Put slightly more charitably, Section 1341 of Obamacare imposed an assessment on Americans with employer-provided coverage, or those who purchase health coverage directly from an insurance carrier rather than through a government-run exchange, to help subsidize exchange insurers with high-cost patients.

The assessments were set to last three years—from 2014 through 2016—serving as a transition while the new marketplaces developed. But after three years, the exchanges are in worse shape than ever. Healthy and wealthy individuals have not purchased coverage, making the exchange population sicker than the average employer plan.

Rather than fixing a problem that onerous government regulations—a mandated package of benefits, and rating requirements that have raised premiums so substantially for healthy individuals that many have chosen to forgo coverage—the Left just wants more of the same. The Robert Wood Johnson Foundation paper included numerous “solutions” straight out of the liberal playbook: Requiring insurers to participate on exchanges; a government-run “public option” intended to destroy private coverage, richer subsidies; and new penalties for late enrollment. In other words, more of the taxes, spending, and regulations that brought us this mess in the first place—not to mention the permanent insurer bailout fund.

Two clear ironies stand out when it comes to the reinsurance proposal. First, the Obama administration has already given insurers far more than they expected—or the law allows—on the reinsurance front. Government officials have repeatedly increased reinsurance reimbursement levels, giving insurers nearly 50% more support from the program in 2014 than they originally expected. And the non-partisan Congressional Research Service believes that the Administration has violated the law by prioritizing payments to insurers over payments to the Treasury—giving insurers billions of dollars in extra funding that legally should be returned to taxpayers.

Second, Barack Obama himself campaigned vigorously against “taxing health benefits” in 2008. He ran ads attacking John McCain for making health insurance subject to income tax, saying the tax would fund subsidies that would go straight to insurance companies. Yet Obamacare contained not one, but two, separate “assessments” (read: taxes) on health plans—the first to fund comparative effectiveness research that could be utilized by health plans reimbursement and coverage decisions, and the second for the “temporary” reinsurance program. After violating his campaign pledge not once, but twice, in Obamacare itself, the president’s allies want Congress to make permanent the tax on health benefits—to finance a bailout fund that will go—you guessed it!—straight to the insurance companies.

With labor force participation still historically low, and Americans struggling with high health costs, now is certainly not the time to tax the health coverage that businesses provide to working families so that insurers can receive billions more dollars in bailout funds. Congress should not even think about throwing good money after bad in a vain attempt to keep the sinking Obamacare ship afloat.

How the Cadillac Tax Could Drive Obamacare Over a Political Cliff

In its economic forecast last week, the Congressional Budget Office revealed a quandary about Obamacare’s “Cadillac tax”: To make the underlying law fiscally sustainable, the tax may end up increasing at a rate that becomes politically unsustainable.

The nugget about the tax, formally known as a high-premium excise tax and set to take effect in 2018, came in CBO’s updated estimates for the law as a whole, which noted:

CBO and [the Joint Committee on Taxation] expect that premiums for health insurance will tend to increase more rapidly than the threshold for determining liability for the high-premium excise tax, so the tax will affect an increasing share of coverage offered through employers and thus generate rising revenues. In response, many employers are expected to avoid the tax by holding premiums below the threshold, but the resulting shift in compensation from nontaxable insurance benefits to taxable wages and salaries would subject an increasing share of employees’ compensation to taxes. Those trends in exchange subsidies and in revenues related to the high-premium excise tax will continue beyond 2025, CBO and JCT anticipate, causing the net costs of the ACA’s coverage provisions to decline in subsequent years.

In other words, under current projections the tax will grow so quickly that it will exceed the annual rising costs of the law’s new entitlements, causing net spending on Obamacare actually to decline.

The Cadillac tax has always caused the administration political heartburn. In 2008, then-Sen. Barack Obama broadcast the most-aired political ad in a decade, attacking Sen. John McCain for wanting to tax health benefits. The Cadillac tax technically targets insurers, not individuals, but videos of remarks by MIT economist Jonathan Gruber, who advised the administration when the health-care law was being developed, show Mr. Gruber saying that Democrats engaged in semantics about the tax and even “mislabeling” to provide political cover for the president to change his position.

When Obamacare was passed, Mr. Gruber wrote articles—promoted at the time by the administration—saying that the Cadillac tax wasn’t a tax. He argued that, in response to the law’s pressures, firms would reduce their health benefits but increase taxable wages—and that paying taxes on these higher wages amounted to a net plus for individuals rather than a tax increase. But in the face of pressure from labor unions, which remain opposed to the tax, Democrats ultimately decided to delay its implementation until 2018, after President Obama leaves office.

In its analysis last week, CBO made clear that the Cadillac tax, coupled with provisions slowing the growth of insurance exchange subsidies (provisions that some liberal groups want to overturn) is central to making the law fiscally sustainable. The question is whether the effects of the Cadillac tax would be any more politically sustainable in 2018 and beyond than they were in 2009—and what supporters of the law will do if they aren’t.

This post was originally published at the Wall Street Journal Think Tank blog.

Tax Treatment of Health Insurance

History:  The origins of the current income tax exclusion for employer-provided health insurance date back to World War II, when large employers successfully pressed the Internal Revenue Service (IRS) to exempt group health insurance from income and payroll taxes, thus allowing firms to offer health benefit policies as a means to circumvent wartime wage and price controls.  The IRS ruling was codified as part of the re-write of the Internal Revenue Code that took place in 1954 (P.L. 83-591), and remains part of the Code at 26 U.S.C. 106(a).  Largely as a result of this policy, employer-provided health insurance grew significantly during the postwar period, and in 2006 provided coverage to 177.1 million individuals, according to the U.S. Census Bureau.[1]

Budgetary Costs:  The growth in the number of individuals enrolled in group health insurance over the past six decades led to a commensurate rise in the tax expenditures associated with the employee exclusion.  The Office of Management and Budget estimates that, in Fiscal Year 2009, the federal government will forego more than $168 billion in income tax revenue due to the employee exclusion; tax expenditures over the next five years will total more than $1.05 trillion.[2]  The Joint Committee on Taxation (JCT) estimates a lower income tax impact for the employee exclusion, at $126 billion per year in FY09, largely because JCT assumes that individuals with high health costs will itemize their health costs over 7.5% of adjusted gross income (AGI).[3]

Employer-sponsored health insurance is also exempt from payroll taxes; however, the budgetary impact of this policy has been less accurately quantified.[4]  A Health Affairs article published in 2006 estimated that in that year, the exclusion resulted in $73.3 billion in foregone payroll tax revenue, along with an additional $23.4 billion in state income tax revenues.[5]  However, because a change in policy subjecting group health insurance coverage to payroll taxes would increase the Social Security wage base for many individuals—leading to a direct increase in promised benefits—the net impact on the federal government is likely significantly less than the estimates cited.

Economic Impact:  Many conservative and liberal economists agree that the employee exclusion, while increasing access to insurance coverage for some populations, has had several adverse and unintended consequences.  Because a marginal dollar of health insurance benefits is untaxed, whereas a marginal dollar of salary can be subject to total tax rates (income, payroll, and state/local taxes) in excess of 40%, additional health benefits are actually more lucrative to workers than an additional dollar’s wages.  Thus the employee exclusion, which is not capped, may encourage workers to consume all the health care they want, rather than the health care they need.

The disparity created by the employee exclusion may explain why the average premium for employer-sponsored insurance is $4,479 for an individual—roughly three times the average $1,500 paid for insurance coverage outside the group market, where premiums paid are generally subject to income and payroll taxes.[6]  It also may help to explain the 157.6% rise in total tax subsidies for health insurance (adjusted for inflation) between 1987 and 2006—while total employment rose somewhat during the period, most of the increase can be attributed to rising premium costs, which an uncapped federal tax subsidy can exacerbate.[7]

The growth in group health insurance coverage, sparked in part by federal tax policy that encouraged employers to offer health benefits, has increased the amount of overall health expenditures made by third-party insurers.  A report released by the Congressional Budget Office in November 2007, which examined both historical trends in health care spending and long-term projections for its growth over the next 75 years, documented a significant shift in health care expenditures: out-of-pocket spending declined from 31% to 13% of all health expenditures (both private and public) between 1975 and 2005, while third-party payment by private insurance carriers increased from 25% to 37% of health spending nationwide.[8]  Although new technologies and services have also helped drive the growth in health spending, the continued rise of third-party payment—which can insulate patients from the marginal costs associated with additional treatments—may well have had inflationary effects.  This shift away from out-of-pocket spending occurred despite the findings of a landmark RAND Institute study, which concluded that higher cost-sharing helped constrain health care spending at little to no adverse effect on patients’ health.

Additionally, the fact that tax policy generally favors employer-provided insurance when compared to health insurance purchased on the individual market tends to have distortionary effects on labor markets.  Although policy-makers have established some other tax benefits for health insurance, these generally have more limitations than the expansive employee exclusion: the self-employed may deduct health insurance premiums from income tax, but are not exempt from 15.3% payroll tax on the cost of policies purchased; Health Savings Accounts (HSAs) allow for pre-tax savings for health expenses, but cannot be used for the purchase of health insurance, except in limited instances; and deductions for medical expenses in excess of 7.5% of AGI only apply to individuals who do not itemize.

The sum total of the effects of the employee exclusion is therefore material from both a fiscal and an economic perspective.  Employees’ inbuilt incentive to over-consume health care encourages rich insurance benefits that insulate consumers from the true costs of care—raising health care costs over time—while depressing cash wages paid.  Moreover, the disparity in the tax treatment of insurance tends to perpetuate “job lock,” whereby individuals gravitate towards positions and industries that offer health coverage to the detriment of those that do not—providing a disincentive for individuals to establish their own businesses and take the entrepreneurial risks that lead to robust economic growth.

Policy Solutions:  In general, some conservatives may support reforms to the current tax treatment of health insurance that accomplish the twin goals of eliminating the disparity between health insurance offered by an employer and non-group coverage and imposing some threshold on the level of tax subsidies provided for health benefits in an attempt to slow the growth of health care costs.  Proposals in this line have varied widely; in his first term, President Bush proposed a tax credit for low-income individuals and families without access to employer-sponsored insurance, as a means to incentivize these populations to purchase health coverage.  Last year, the President proposed a new standard deduction for health insurance, similar to that first proposed by the Tax Reform Panel in 2005, that would provide tax subsidies for coverage purchased up to a set level premium ($7,500 in the case of the budget proposal submitted to Congress).[9]

Other proposals have looked to replace the current exclusion for health insurance with a tax credit available to all individuals, paid for by capping or repealing entirely the current tax subsidy for group health insurance.  Policies in this vein include provisions in the first title of comprehensive health and entitlement reform legislation (H.R. 6110) introduced by Budget Committee Ranking Member Paul Ryan (R-WI), along with the health reform plan promoted by Sen. John McCain (R-AZ).  In most cases, the credits would be refundable (i.e. paid to individuals with tax liability less than the amount of the credit) and advanceable (i.e. paid out on the same monthly basis as health insurance premiums, rather than in conjunction with the filing of an annual return).

Conclusion:  Despite—or perhaps because of—the multitude of proposals designed to reform the current tax treatment of health insurance, most conservatives share the over-arching goal of improving an arguably archaic system of tax subsidies, rooted in a wartime bureaucratic decision, that has distorted America’s more than $2 trillion health sector while inhibiting economic growth.  Although the health plan released by Sen. Barack Obama omits any discussion of the damaging and perverse effects of current tax policies on both the health sector and the broader economy, some conservatives may believe that revisiting current tax policy should be at the top of any health reform agenda.

 

[1] U.S. Census Bureau , “Income, Poverty, and Health Insurance Coverage in the United States: 2006,” (Washington, DC, Report P60-233, August 2007), available online at http://www.census.gov/prod/2007pubs/p60-233.pdf  (accessed July 2, 2008), Table C-1, p. 66.

[2] Table 19-1, Estimates of Total Income Tax Expenditures, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2009, available online at http://www.whitehouse.gov/omb/budget/fy2009/pdf/spec.pdf (accessed July 1, 2008), p. 302.

[3] Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011,” (Washington, DC, Committee Print JCS-3-07, September 2007), available online at http://www.jct.gov/s-3-07.pdf (accessed July 2, 2008), Table 1, p. 36.  For comparison with Treasury estimations, see narrative section at pp. 24-25.

[4] The payroll tax exclusion can be found at 26 U.S.C. 3121(a)(2).

[5] Thomas Selden and Bradley Gray, “Tax Subsidies for Employment-Related Health Insurance: Estimates for 2006,” Health Affairs 25(6), November/December 2006, pp. 1570-71.

[6] Kaiser Family Foundation, “Employer Health Benefits: 2007 Annual Survey,” available online at http://kff.org/insurance/7672/upload/76723.pdf (accessed July 2, 2008), p. 2; eHealthInsurance, “The Cost and Benefits of Individual Health Insurance Plans: 2007,” available online at http://www.ehealthinsurance.com/content/expertcenterNew/CostBenefitsReportSeptember2007.pdf (accessed July 2, 2008), p. 23.  It should also be noted that in recent years, the average premium in the eHealthInsurance survey has remained nearly constant, while the average deductible has risen slightly; this would lend further confirmation to the concept that individuals purchasing health care on their own, particularly on an after-tax basis, make rational choices between potential out-of-pocket costs and overall premium levels when shopping for policies.

[7] Selden and Grey, p. 1577.

[8] Congressional Budget Office, “The Long-Term Outlook for Health Care Spending,” (Washington, DC, Publication #3085, November 2007), available online at http://www.cbo.gov/ftpdocs/87xx/doc8758/11-13-LT-Health.pdf (accessed July 2, 2008), pp. 12-13.

[9] Information on the Standard Deduction for Health Insurance proposed as part of the Fiscal Year 2009 budget can be found in the Treasury Blue Book at http://www.ustreas.gov/offices/tax-policy/library/bluebk08.pdf (accessed July 2, 2008), pp. 22-25.  Details on the Tax Reform Panel proposal can be found at http://www.taxreformpanel.gov/final-report/TaxReform_Ch5.pdf (accessed July 2, 2008), pp. 20-24.