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Obama’s Tax on Work
McCain can win votes by exposing the folly of "pay or play."


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James C. Capretta

If the race for the presidency is framed as a choice between a reform-minded, independent, but conservative-leaning candidate and a conventional liberal committed to discredited statism, Sen. John McCain can win. Fortunately for Republicans, that is a fairly accurate description of the choice voters face this year. McCain’s challenge is to ensure most Americans see the race this way even as the media remain under the spell of his opponent, Sen. Barack Obama. Meeting this challenge will require exposing Obama’s flawed agenda, even if the press calls such an exercise “negative campaigning.”

McCain’s recent speech on the economy and jobs in Denver helped in this regard. Taxation is still a crucial issue for drawing the conservative-liberal contrast. Indeed, it is inconceivable that a Republican could win the presidency without tapping into the still-strong anti-tax sentiment among voters. McCain used his brief remarks to remind Americans there is a big difference between the parties on taxes again this election year. Even with a stagnant economy and job losses, Obama remains committed to a massive and damaging tax hike. McCain, on the other hand, is promising no tax increases, targeted tax relief to strengthen families, and business tax cuts to spur growth. McCain must hammer the tax issue home from now until November.

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But traditional tax issues are not McCain’s only weapon. The most promising new line of attack against Obama, previewed by McCain in the Denver speech, was this:

Small businesses are the job engine of America, and I will make it easier for them to grow and create more jobs. My opponent wants to make it harder by imposing a “pay or play” health mandate on small business. This adds $12,000 to the cost of employing anyone with a family. That means new jobs will not be created. It means existing employees will have their wages cut to pay for this mandate.

Prior to the Denver speech, Obama’s endorsement of “pay or play” had gone largely unmentioned. But McCain was right to raise it now, as this is an issue that could pay real dividends in November.

Obama of course did not invent “pay or play” — it has been on the Democratic policy wish list for more than two decades. In fact, former Massachusetts Governor Michael Dukakis, in his failed campaign for the presidency in 1988, pushed “pay or play” as the key to achieving universal coverage. But after he lost that race, even his home state abandoned the idea, repealing the version Dukakis had pushed through as governor.

The concept hasn’t gotten any better with time. The idea behind “pay or play” is to expand coverage to uninsured workers and their families by forcing a choice on all but the smallest employers. They can either offer government-approved health coverage to workers (“play”) or pay a tax instead to finance government-sponsored or organized insurance on behalf of their workers and families. Obama’s health care plan, released in May 2007, does not specify what the tax rate would be for those employers not sponsoring health insurance, but a similarly constructed plan drawn up by Commonwealth Fund executives set it at 7 percent of payroll. Gov. Arnold Schwarzenegger’s failed effort at health care reform in California would have imposed a 4 percent payroll tax on firms with 10 or more employees and no employer-sponsored insurance plan.

“Pay or play” advocates argue that it is the most direct way to cover the uninsured, most of whom work or are in households with those who do. But the real issue for these workers is affordability. Health-insurance premiums are paid by households, not businesses, even if the company is sponsoring the insurance plan. In a competitive labor market, employers only pay workers what they are worth to the firm. The more they are required to pay in benefits, the less there is to pay cash wages. Low-wage workers are going without coverage mainly because the premium costs for insurance would take too big of a bite out of their take-home pay. “Pay or play” ignores this reality and attempts to force workers to pay these premiums anyway.

The consequences for the lowest paid workers would be devastating. For those earning just above the minimum wage, employers would not be able to take the full cost “pay or play” out of wages because it would push cash compensation below the minimum allowable. These employers would therefore have no choice but to eliminate these jobs, lest they end up paying more for their workforce than it is worth to the firm. Katherine Baicker of Harvard and Helen Levy of the University of Michigan estimate that an employer health-insurance mandate would destroy about 224,000 low-wage jobs, with the losses disproportionately concentrated among non-whites, high school drop-outs, and women. Another study found that a version of California’s “pay or play” scheme, passed in 2003 but later repealed, would have eliminated 71,000 jobs in that state alone.

The Obama campaign likes to say their plan would “build on” today’s system of job-based coverage, in large part because they believe “pay or play” would secure employer participation. But, understood properly, “pay or play” would have exactly the opposite effect. Employers would quickly figure out that “paying” would be less expensive and risky than continuing oversight of a company-sponsored plan prone to rapid premium escalation. Instead of bolstering private coverage, “pay or play” would become the excuse for companies to drop their plans and push their employees into public insurance. The Lewin Group estimates that the plan written by Commonwealth Fund executives would add 40 million people to a Medicare-like insurance option in year one.

Sen. McCain’s health-care plan attacks the problem of affordability head on. He would give low wage workers a refundable tax credit which would make private coverage more affordable. And he would pay for this tax credit by redirecting resources away from high wage workers, especially those enrolled in overly-expensive company-run plans. The contrast with “pay or play,” a regressive and job-killing tax on work, should be made plain and clear to voters.

James C. Capretta is a fellow at the Ethics and Public Policy Center and a health policy and research consultant.



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