Liberal policy wonks -- and even some who aren't so liberal -- did a double take when they read the new tax plan floated by the Bush administration in the Washington Post on Thursday. Was the White House really suggesting eliminating incentives for employers to offer their employees health insurance plans? Was it really proposing to shift the country's tax burden even further onto states that didn't vote for Bush, like New York and Massachusetts?
The Post reported that according to White House advisors, the Bush administration "plans to push major amendments that would shield interest, dividends and capital gains from taxation, expand tax breaks for business investment and take other steps intended to simplify the system and encourage economic growth."
The plan would further shift the tax burden off of people whose money comes largely from interest and investments -- the very rich -- a prospect that liberals find disheartening but not surprising. But what really caught financial experts' attention was the next paragraph, which explained how Bush intended to pay for these tax cuts.
"The changes are meant to be revenue-neutral," the Post explained. "To pay for them, the administration is considering eliminating the deduction of state and local taxes on federal income tax returns and scrapping the business tax deduction for employer-provided health insurance, the advisers said."
"Revenue-neutral?" asks Martin Press, a high-profile tax attorney and registered Republican. "There's no such thing. When lawmakers refer to 'revenue neutral,' they mean it helps someone and hurts someone else." If such policies move forward, says John Irons, associate director for tax and budget policy at the Center for American Progress, a liberal think tank, "You'll see an economy that benefits only the very few at the very top. People in the middle will be squeezed, people in the low end won't be helped at all."
The first part of the plan -- which would get rid of federal tax deductions for state and local income tax -- would fall disproportionately hard on Democratic-voting states, which already pay more in taxes than they receive from the federal government. On his blog MaxSpeak, the economist Max Sawicky calls the proposal "The Bush Blue State Tax." Experts say the second part, which would do away with the tax deduction granted to employers for providing health insurance, would likely throw millions of people out of group plans, forcing them to buy far more expensive individual insurance.
Irons was so amazed by the health insurance proposal he read it twice. Right now, employers get a tax break for offering health insurance plans to their employees. Take that away, and there would be no reason for many companies to bother.
"If you're trying to imagine the quickest way to create millions of uninsured people, that's it," Irons says. "Something like 52 percent of everyone who has health insurance has it through their employer." Without the tax benefit, he says, "I would expect a ton of companies to drop health insurance altogether. And that would throw their employees out on the mercy of the market."
Of course, people who get health insurance through their companies have to pay for it, generally through payroll deductions, and presumably, if companies no longer offered health benefits, employees would see increases in their paychecks.
But that doesn't mean they could just go out and buy health insurance on their own, as anyone who has ever tried to buy coverage understands. Individual health insurance is far more expensive than group plans, and individuals have less power to negotiate. "People would be tossed out of these group plans and they'd have to fend for themselves, and it would be prohibitive," says Sawicky, who works at the Economic Policy Institute, a Washington think tank. "They'd have to take [a policy] much more narrowly focused on catastrophic coverage and they'd have to pay much more out of pocket."
Press says: "If you quit your job and your health insurance ends, COBRA, a federal law, allows you to buy it [temporarily] from the employer at the employer's rates. I have seen people spending $6,000 a year on COBRA, and when they have to go out and get their own policy, it goes from $6,000 to $25,000."
Press is a partner at the law firm Gunster Yoakley, whose clients include Bank of America, J.P. Morgan Chase & Co. and Hilton Hotels Corp. He's no bleeding-heart liberal. But, he says, "Taking away the deduction for healthcare premiums? I don't see any logic for that under any theory."
Sawicky does. Health insurance companies, he says, "would make more selling to individuals. Not that they're not making any money now, they'd just like to make more."
If removing the health-insurance deduction would reward some of the administration's supporters, removing state and local tax deductions would punish its enemies.
Why? Because these state and local income taxes are highest in such blue states as New York, Massachusetts and California, says Press. New York City also has an income tax. State taxes are lowest in the red states, which provide fewer services. Texas and Florida have no income tax at all.
Right now, people who itemize their tax returns -- about 30 percent of taxpayers, according to Sawicky -- can write off the money they pay in local taxes, thus reducing their federal taxes. "If you're in New York and you're a high-income person, you pay more state income tax, but the blow is less severe because you can deduct it," says Sawicky. "So in effect the price of your state income tax has been reduced. If you pay a dollar in state income tax and you're in the 35 percent bracket, you can deduct $.35, so in effect your state income tax is only costing you $.65 on the dollar."
"If you take away those deductions, you're in reality increasing the taxes on high-taxing, generally blue states," says Press.
Because this proposal would increase the sting of state income taxes, it would make it harder for states and cities to raise their taxes and build up state programs like childcare and health insurance. It would allow small-government conservatives to exert their influence on blue-state social policy. "If you take away the deduction for state income taxes, their logic is that you'll force government to be smaller," says Press.
Sawicky, for one, doesn't actually expect these provisions to pass. He sees them as "bogeymen" -- bargaining chips that can be scrapped in the fight to push forward the administration's real agenda: lowering taxes on the wealthy. The new deductions, says Sawicky, could allow the administration to say that it has a plan for paying for its tax cuts, "but I don't think they're very serious."
Beyond these proposals, he says, "The more general problem is the administration's policy, which is to blow holes in the tax system and let the deficit go to hell." He expects this to lead to a financial crisis that will force the government to slash social programs -- what right-wing operative Grover Norquist calls the "starve the beast" strategy.
So is the Bush administration truly pushing a system in which someone who lives off interest and dividends -- say, Paris Hilton -- would pay less tax than the person who cleans her bathroom? "Yes," Press says.
Irons explains it this way: "I was recently at the Treasury Department, where they were talking about eliminating the estate tax. The attitude was very much, 'Why doesn't everyone realize that we're the ones who create the jobs? Why doesn't everyone realize that it's us, the super-rich, that drive the economy?'"
He continues: "The attitude is that everyone who is working 40 hours a week doing an average job at a construction site, or is a store clerk, or me sitting in an office doing economic analysis, is feeding off the people who are the real successes. The attitude is that the economy should be geared to benefit the people who are business owners, who are rich, who are giving us the benefit of jobs. That's what you really see in the tax code."