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The Baucus Plan’s Penalties on Work



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Late last week, Sen. Max Baucus, Chairman of the Senate Finance Committee, tried to jump start the push for a sweeping health-care bill by letting it be known that he has made progress toward a “bipartisan” deal in his committee on a health-care plan.

Of course, no one knows for sure what’s in the Baucus plan except for a handful of people. There have been two Congressional Budget Office (CBO) tables provided to the committee indicating how much alternative versions of plan would cost over the coming decade, but neither estimate been released to the public by the committee. The insistence on complete secrecy just days before a planned markup of the bill would seem to contradict pronouncements of total confidence in its popularity and inevitability.

Still, despite the secrecy, some of the details are now clear enough to make some analytical judgments — thanks, in part, to a post by Ezra Klein of some slides which apparently reflect where the emerging plan now stands. And it is clear from the details provided in those slides that the draft Baucus plan would impose severe financial penalties on the earned income of low-wage workers.

The centerpiece of the Baucus plan is a new entitlement to health insurance premium subsidies.  The very lowest income households (perhaps below 133 percent of the federal poverty line, or about $29,300 for a family of four in 2009) would get full subsidization of their premiums, likely worth about $12,000 per year. That subsidy would then get phased down as household income rises. In the original Baucus plan, the cut-off point was 400 percent of poverty, or $88,200 per year.  But CBO said that plan would cost $1.6 trillion over a decade, sending shock waves through Democratic circles. Senator Baucus and his staff subsequently vowed to cut back the total governmental cost of the plan to under $1 trillion over ten years — without abandoning their goal of “universal coverage.” How to do that? Continue to make people buy the insurance — the so-called “individual mandate” — but give them less by way of subsidization when they do so. The new Baucus plan would cut subsidies off at 300 percent of poverty, or $66,150 for a family of four.

But phasing out subsidization of expensive health-insurance plans in this manner imposes very high implicit tax rates. If the total premium for an average health insurance plan for a family costs $12,000 per year, under the updated Baucus plan a worker would lose $.33 in health premium subsidization for every $1 earned in the phase-out range. That implicit 33 percent tax rate would be come on top of existing federal payroll and income taxes, as well as the implicit taxes associated with phasing-out the earned income tax credit, food stamps, and housing vouchers. Quite literally, if the Baucus plan were to pass, it would not pay for millions of lower income Americans to take higher paying jobs because much of the wage gain would be lost to the government.

The problem would be compounded by Senator Baucus’s elaborate “pay or play” scheme. Several options are presented in the slide deck, but it’s clear that the most likely scenario is a penalty on employers if they don’t provide government-approved insurance for lower wage workers and their families who would be eligible for premium subsidization if they weren’t enrolled in a job-based plan. This is a transparent effort to push more costs onto employers in order to keep the overall federal costs of the Baucus plan to “just” $1 trillion. 

But what will employers do if faced with such a requirement? For starters, they will avoid hiring low wage workers, as the “pay or play” mandate wouldn’t apply to workers with higher incomes. Is that what the Democrats really intend? Moreover, to avoid paying the penalty, firms would re-organize themselves so that they contract with other firms for low-wage labor instead of hiring the workers directly themselves.

After the success of welfare reform in 1996, you’d think Congress would have learned that the last thing they want to do is to penalize work among low-wage households. It’s completely counterproductive to make such households ever more dependent on government assistance. But that’s exactly what the emerging Baucus plan would do.



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