Commentary: The Long Tortuous Path to the Single-Payer Payroll Tax (December 2013)

By John McClaughry 

For two years the Shumlin Administration has been ducking the question of the huge payroll tax needed to fill a $2 billion hole in  Green Mountain Care. It’s time we faced the awful truth.

Sooner or later the problems with Vermont Health Connect will be solved, thanks to the John McClaughrycontinual application of federal funding that so far in just this one small state has reached an astounding $170 million. The looming issue will then be finding out just how Gov. Peter Shumlin expects to finance his all-encompassing Green Mountain Care, scheduled to materialize in 2017.

Upon becoming governor in 2011, Shumlin moved aggressively to restart the single payer process stalled by Gov. Jim Douglas’s 2005 veto. The first step was delivery of yet another study, this one by Dr. William Hsaio of Harvard. His report promised that single payer (his “Option 3”) would produce a first-year “savings” of $590 million – provided the legislature did it precisely his way, which they naturally did not. To finance the plan Hsaio proposed a new payroll tax – 9.4% on employers and 3.1% on employees.

Act 48, signed by Shumlin in 2011, set forth the structure and sweeping powers of Green Mountain Care. It also required an administration report on how GMC would be financed. This was made due in January 2013, well after the 2012 elections.

Meanwhile the state had contracted with the University of Massachusetts Medical School to deliver another $300,000 report on GMC financing. From the emails between the Administration and UMass, Vermonters for Health Care Freedom discovered that as the January 2013 release date approached, the Administration had told UMass to withhold politically dangerous financing recommendations.

Last month a business-financed study by the Avalere Health Group found that GMC would need at least $2 billion in new tax dollars – more than three times Vermont’s personal state income tax receipts. This was $400 million more than the $1.6 billion announced by the UMass study. It also closely corroborated the study by Rutland Treasurer Wendy Wilton, which the Administration reflexively dismissed (because she was a Republican candidate for Treasurer.)

Now Shumlin says that there’s no need for the legislature to concern itself with this issue until 2015, after yet another election. So where are we?

Shumlin and his lieutenants expect to finance GMC by, first, using all the Medicaid funds from Washington (that require state matching money). Then, by getting Washington to deliver to Montpelier all the premium tax credits authorized by ObamaCare. Then, by turning to the Hsaio solution, a unique new payroll tax.

Some GMC advocates ardently believe that ever higher progressive income tax rates is the solution. But Shumlin, like Govs. Dean and Douglas, is aware that a top bracket income tax rate anywhere beyond ten percent is a potent economy killer (the rate is currently 8.95% of taxable income over $398,350, sixth highest in the nation).

Similarly, Democrats have always been allergic to the sales tax, and in any case even the highest sales tax in the nation wouldn’t be anywhere close to producing the $2 billion needed to fill the GMC hole.

That’s why Shumlin is driven to the payroll tax. The thinking is that since businesses and individuals won’t be paying health insurance premiums any more, the new payroll tax will grab those “savings” to pay for GMC.

The federal government imposes payroll taxes (FICA and FUTA) for social security, Medicare, and unemployment insurance. Five states levy a payroll tax to partially pay for employee disability insurance premiums, three states use it to fund unemployment insurance benefits, and three states use it to partially fund worker’s compensation insurance. Hawaii requires employees to pay up to 1.5% of their income toward their mandated health insurance premiums, with their employers picking up the remainder. No state levies a payroll tax to finance anything resembling a state-run single payer program like GMC.

How much of a payroll tax would it take? Hsaio said 12.5% for his now-abandoned plan. In July 2012 Administration Secretary Jeb Spaulding said that a 14.5% payroll tax is “a nonstarter”, because it would inflict undue harm on Vermont businesses. In September 2013 Shumlin admitted that a new payroll tax would be “a major part” of GMC financing, but didn’t offer a tax rate.

Is there any way GMC can be financed that doesn’t wreck the health care system and the economy? If there is – highly doubtful – it would require a thin menu of “essential benefits”, aggressive rationing of care, taxing self-insured ERISA companies that now cover about 100,000 employees, getting Washington to agree to hand over the ObamaCare subsidies, slashing compensation to providers (through “payment reform” so far achieved nowhere) without decimating their ranks, and levying an enormous first in the nation payroll tax on employers and employees.

As he faces these challenging facts, Shumlin may be reminded of the remark of Col. Ethan Allen upon being surrounded by British regulars and howling Indians in his ill-fated expedition to Montreal: “I saw that this would be a day of trouble, if not rebuke.”

-  John McClaughry is vice president of the Ethan Allen Institute

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