Commentary: A Premium and a Tax Are Not the Same Thing (October, 2013)

by Rob RoperRob Roper

In an interview with Times Argus editor, Steve Papas, Governor Peter Shumlin revealed that he intends to pay for his single payer healthcare plan largely with a payroll tax. This isn’t really a surprise, despite the fact that proponents of single payer in Montpelier have been at great pains to maintain the impression that no decision had been made on how to pay for the $5 billion plus program.

In reality, there never were a whole lot of options. Vermont already has some of the highest marginal income tax rates in the country. Our property taxes are equally high. Our sales tax at 6 percent has to compete with New Hampshire’s rate of 0 percent, so, Dr. William Hsiao, in his 2010 report on single payer for Vermont recommended a payroll tax of 14.5 percent (11 percent on the employer and 3.5 percent on the employee) to cover the bill. Now, Shumlin hinted to Papas that a payroll tax of as much as 18 percent would be acceptable. The rate is already going up!

The governor shrugged off what he admitted would be the “largest tax increase in state history” as it would be coupled with “the largest premium reduction.” He said, “You can call it a tax or a premium, but it’s coming out of our [employers’] bottom line.”

But, a tax and a premium are not the same thing. Between the two, the payroll tax is a far worse deal for Vermont employers.

Perhaps the biggest and most obvious difference between a payroll tax and a premium is that if you don’t pay a tax you are a criminal. If you fail to pay in full, liens can be placed upon you, your business can be seized, you can go to jail. You have no choice about whether or not to pay a tax. You cannot negotiate the terms of a tax. You cannot switch to a more competitive government. You cannot decide to drop a tax if the burden becomes fatally high for your business.

One of the great benefits of a single payer healthcare system was supposed to be that it would take the burden of paying for employees’ health insurance off of the shoulders of employers. Doing so would give Vermont a real competitive edge in drawing new jobs to our state, and it would help our economy grow. Great idea! But how is replacing the burden of a somewhat flexible premium with the burden of an inflexible tax removing any burden from the employer? It doesn’t. Moreover, many if not most Vermont businesses will have an even larger burden to bear.

Small businesses that cannot currently afford to offer health insurance, and therefore pay nothing, will have a new – perhaps unbearable – financial burden with the new payroll tax. Employers who insure under federal ERISA laws will be saddled with a payroll tax on top of their current health insurance bills. If they like the insurance they have, the law will essentially make them pay twice to keep it. (If Vermont ERISA employers are exempt from the payroll tax the rate on those remaining the system would rise to an estimate of over 25 percent.) For the non-ERISA employers who do provide health insurance, it will be a mixed bag of benefit or punishment. Some may do okay, at least in the short term, particularly low-wage employers. Some will be punished, perhaps to the point of destruction.

What all employers will have in common is the fact that they will have traded a somewhat flexible cost over which they have some control for a tax over which they have no control, and face severe liabilities if they can’t pay. Who in their right mind would sign up for this?

More concerning is the likelihood that the payroll tax rate will rise even faster than current premiums are rising. The hope is that politicians will have the competence to run a more efficient system and the spine to reign in spending. (Honestly, who isn’t laughing out loud after reading that last sentence?)

All factors under single payer point toward rapidly growing tax rates. Fundamentally, single payer will immediately increase the number of people in the system by 7 percent, raising costs. By virtue of providing “free” care to the consumer, single payer will increase demand, again raising costs. The political pressure to expand benefits will be tremendous, and there are no mechanisms, apart from economic collapse, to put on the brakes.

Yes, we need to reform our healthcare system. We need to remove the burden of providing insurance from employers and create transportability for individuals. We need to find ways to provide those who can’t afford care with the services they need. But, all of these problems require solutions involving more choices, more flexibility, and economic growth. Creating a government monopoly funded by a payroll tax on job creators — criminalizing them if they can’t keep up with Montpelier’s desire for tax dollars — is not he way to go.

– Rob Roper is President of the Ethan Allen Institute.

{ 2 comments… read them below or add one }

R.W. Holden October 3, 2013 at 9:12 pm

“leans” & “breaks”?
I hate it when someone I admire, whose writing is logical and precise, cannot select the correct homophone, thereby detracting from his argument.
C’mon Rob, we’re rooting for you.


Rob October 3, 2013 at 9:56 pm

Thanks for the eyes. Corrections made. I must confess that spell check for me is not so much a crutch as a full body cast, so I do appreciate folks pointing out the ones I miss. — Rob


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