One of the reasons why our government is so messed up is because its so complicated. Complexity is the best friend of clever—but dishonest—people who take advantages of subtleties of the law to enrich themselves at the expense of others. Nowhere is this more true than in the U.S. health-care system. And one of the biggest perpetrators of financial shenanigans in our health-care system is state governments. Because Washington subsidizes health insurance for hundreds of millions of Americans, states have figured out that by taxing insurance premiums, they can generate billions of dollars in extra revenue for themselves. But that revenue comes at a cost: not only to taxpayers in other states, but to those for whom health insurance is increasingly unaffordable. And it has big ramifications for states that want to implement Obamacares expansion of Medicaid.
State taxes make employer-based insurance costlier
Lets take the example of Ohio. Ohio applies two taxes to private health insurance premiums: a 5.5 percent state sales tax, and a 1.0 percent state health insurance tax, for a total of 6.5 percent. In 2011, the average employer-based health plan for a single person cost $5,025, which means that the average Ohioan is spending an extra $327 a year on insurance taxes.
The federal government spends $300 billion a year through the tax code to subsidize employer-sponsored health insurance. Ohio represents about 3.7 percent of the total U.S. population. If we do a back-of-the-envelope calculation, that means that $11.1 billion of that subsidy flows through Ohio, and that by charging 6.5 percent in premium taxes, the Ohio state government collects $721.5 million a year in tax revenue, purely from the federal subsidy of employer-sponsored insurance.
Not only do states assess sales taxes, but also counties, cities, and towns. According to Vertex, a provider of corporate tax software, the average combined state-local sales tax rate in the U.S. in 2012 was 9.61 percent. That means that the federal government is spending an extra $29 billion a year or so to subsidize employer-sponsored health insurance, on sales taxes alone. Add in taxes specific to health insurance premiums, and were easily talking $30-35 billion a year.
State taxes increase federal Medicare, Medicaid spending
Of course, the federal government doesnt just subsidize health insurance through the tax code, but also through the giant health-care entitlements, Medicare (for the elderly) and Medicaid (mostly for the poor). In recent years, an increasing amount of Medicare and Medicaid services are being delivered by private insurers. Private insurers sponsor Medicare Advantage plans through Medicare Part C, Medicare prescription-drug plans through Medicare Part D, and Medicaid managed-care plans.
Washington, depending on how you count it, spends around $50 billion a year on Medicare Part D and about $200 billion a year on Medicare Advantage. And almost half of Medicaid enrollees are in private managed-care plans, accounting for around $150 billion a year today, and much more in future years due to Obamacares expansion of the program.
So, adding it all up—with the caveat that these are, again, back-of-the-envelope calculations—thats $400 billion a year that the federal government spends on privately-managed Medicare and Medicaid plans, and, thereby, more than $40 billion a year that state governments collect in tax revenue by taxing Medicare and Medicaid premiums.
Adding all of that up, and Washington is transferring something like $75 billion a year to state governments due to an accounting trick.
Tax trick being used to justify Medicaid expansion
This accounting gimmick is, behind the scenes, playing a huge role in the talking points used by advocates of Obamacares Medicaid expansion. For an example, lets go back to Ohio.
A recent report by the Health Policy Institute of Ohio—a center-left think tank—trumpeted the gusher of state tax revenue that would pour into the state if it expands Medicaid using private managed-care plans. Using models from the Urban Institute and Ohio State, HPIO calculates that expanding Medicaid would increase state sales tax and premium tax revenue by $1.6 to $1.7 billion over ten years, running at about $250 million a year in 2022.
This new tax revenue makes it almost “free”—to Ohioans—to expand Medicaid. Sticking with Urban Institute figures, HPIO estimates that Ohio would have to spend an additional $2.5 billion over ten years on expanding Medicaid, of which $1.7 billion would be paid for by new premium tax revenues. In other words, states that use private insurers to manage their Medicaid programs, and apply sales and premium taxes to those plans, can almost entirely offload the costs of expanding Medicaid to federal taxpayers.
The state revenue “windfall” from premium taxes also played a big role in the recent expansion of Medicaid in Arkansas. The Arkansas Department of Human Services commissioned an analysis that projected that Arkansas would have to spend $842 million over ten years on the Medicaid expansion, but would receive $436 million in “added premium tax revenue” in exchange. These additional revenues led state-based Obamacare activists to claim that expanding Medicaid is “fiscally responsible.”
States also ripping off the feds with provider taxes
This kind of fiscal gaming has been going on for a long time. States have long used taxes on hospitals—called provider taxes—to goose federal Medicaid subsidies. Provider taxes work in a similar way to premium taxes. The state levies taxes on the hospitals; the hospitals pass on those costs in the form of higher prices. The state also sets reimbursement rates for the Medicaid program, so the state then increases those rates by an amount equal to the tax increase, so hospitals and the state get of scot-free. But because the state is spending “more” on Medicaid, and federal subsidies for the Medicaid program are keyed off of state spending, the state receives more money from Washington.
“Provider taxes…enable states to manipulate the statutory funding mechanism [for Medicaid], adding to the federal deficit,” editorialized the Washington Post in 2012. According to Nicole Kaeding of Americans for Prosperity, every state except Alaska employs this tactic to manipulate Washington into subsidizing state budgets. And ending this fiscal manipulation has been proposed by both Democrats and Republicans. President Obamas last two budget proposals call for capping state-based provider taxes. The number two Democrat in the Senate, Dick Durbin (Ill.), has called state provider taxes a “charade.” Sen. Bob Corker (R., Tenn.) has proposed phasing it out entirely, as did the Simpson-Bowles deficit commission.
Premium taxes are a far more serious problem than provider taxes, because they drive up the cost of health insurance for the 180 million Americans with private coverage, along with making it costlier to subsidize coverage for the poor.
Eliminating premium taxes should be a prime component of deficit talks
If Democrats and Republicans can get together to eliminate provider taxes, surely they should be able to get together to eliminate premium taxes, which are a far greater problem. Phase-out of premium taxes should be a top component of the next round of budget negotiations.
It would be nice to see the Government Accountability Office, or some similar arm of the federal government, compile state-by-state statistics on sales and premium taxes, and how much they drive up the cost of federal health care spending, and also how much they increase the size of the federal tax expenditure on employer-sponsored insurance. I suspect that the numbers will startle everyone in Washington.
You might ask: if this problem is so serious, why hasnt anyone raised it before? Its because none of the players in Washington has had an incentive to raise the issue. Americas Health Insurance Plans, the insurer trade group, has launched a full-fledged campaign against Obamacares federal health insurance tax. “End the [Obamacare] health insurance tax,” AHIP urges on its website. “The Congressional Budget Office,” notes AHIP, “has said that this tax will be ‘largely passed through to consumers in the form of higher premiums.” Oliver Wyman believes that the tax could increase the cost of health insurance by as much as 4 percent.
But as far as I know, AHIP has been silent on the question of state-based premium taxes. The big for-profit players in Medicaid managed care—Centene (NYSE: CNC), Humana (NYSE: HUM), Molina (NYSE: MOH), WellCare (NYSE: WCG), and WellPoint (NYSE: WLP)—make enormous amounts of money because of the huge fiscal incentive that states have, through premium taxes, to outsource the administration of their Medicaid programs to private insurers.
Libertarians like to say that “taxation is theft.” Whether or not you agree with them, it cant be denied that when it comes to state-based premium taxes, they have a strong case. States are effectively stealing from taxpayers in other states—and from their own privately insured citizens—in order to make their politicians look more generous than they actually are. Its up to Congress to cuff these perps.
Original Source: http://www.forbes.com/sites/theapothecary/2013/05/25/how-state-governments-raise-costs-and-rip-hundreds-of-billions-off-the-federal-government-using-health-insurance-premium-taxes/