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Levy Viewed as Way to Reduce Deficits, Fund Health Reform

By Lori Montgomery
Washington Post Staff Writer
Wednesday, May 27, 2009

With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.

Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.

At a White House conference earlier this year on the government's budget problems, a roomful of tax experts pleaded with Treasury Secretary Timothy F. Geithner to consider a VAT. A recent flurry of books and papers on the subject is attracting genuine, if furtive, interest in Congress. And last month, after wrestling with the White House over the massive deficits projected under Obama's policies, the chairman of the Senate Budget Committee declared that a VAT should be part of the debate.

"There is a growing awareness of the need for fundamental tax reform," Sen. Kent Conrad (D-N.D.) said in an interview. "I think a VAT and a high-end income tax have got to be on the table."

A VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. It is also hugely regressive, falling heavily on the poor. But VAT advocates say those negatives could be offset by using the proceeds to pay for health care for every American -- a tangible benefit that would be highly valuable to low-income families.

Liberals dispute that notion. "You could pay for it regressively and have people at the bottom come out better off -- maybe. Or you could pay for it progressively and they'd come out a lot better off," said Bob McIntyre, director of the nonprofit Citizens for Tax Justice, which has a health financing plan that targets corporations and the rich.

A White House official said a VAT is "unlikely to be in the mix" as a means to pay for health-care reform. "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers," said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

Still, Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel and author of the 2008 book "Health Care, Guaranteed." Meanwhile, former Federal Reserve chairman Paul A. Volcker, chairman of a task force Obama assigned to study the tax system, has expressed at least tentative support for a VAT.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it."
Seeking New Revenue

The surge of interest in a VAT is testament to the extraordinary depth of the nation's money troubles. While some conservatives have long argued that a consumption tax would provide a simpler and more efficient alternative to the byzantine U.S. income tax code, this time it's all about the money.

The federal budget deficit is projected to approach $1.3 trillion next year, the highest ever except for this year, when the deficit is forecast to exceed $1.8 trillion. The Treasury is borrowing 46 cents of every dollar it spends, largely from China and other foreign creditors, who are growing increasingly uneasy about the security of their investments. Unless Congress comes up with some serious cash, expanding the nation's health-care system will only add to the problem.

Obama wants to raise income taxes for high earners and impose new levies on business, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Obama's plan to tax greenhouse-gas emissions could raise trillions of dollars, but again, Congress is balking.

Key lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance. The last proposal could raise a lot of money -- nearly $1 trillion over the next five years, according to White House budget documents. But options on the table would raise a fraction of that sum. And while it might pay for health care, it would barely dent deficits projected to total nearly $4 trillion over the next five years and to grow rapidly in the future, as baby boomers draw on Social Security and Medicare.

Enter the VAT, one of the world's most popular taxes, in use in more than 130 countries. Among industrialized nations, rates range from 5 percent in Japan to 25 percent in Hungary and in parts of Scandinavia. A 21 percent VAT has permitted Ireland to attract investment by lowering its corporate tax rate.

The VAT has advantages: Because producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT, the tax is hard to dodge. It punishes spending rather than savings, which the administration hopes to encourage. And the threat of a VAT could pull the country out of recession, some economists argue, by hurrying consumers to the mall before the tax hits.
A VAT's Bottom Line

What would it cost? Emanuel argues in his book that a 10 percent VAT would pay for every American not entitled to Medicare or Medicaid to enroll in a health plan with no deductibles and minimal copayments. In his 2008 book, "100 Million Unnecessary Returns," Yale law professor Michael J. Graetz estimates that a VAT of 10 to 14 percent would raise enough money to exempt families earning less than $100,000 -- about 90 percent of households -- from the income tax and would lower rates for everyone else.

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent. A gallon of milk would jump from $3.69 to $4.61, and a $5,000 bathroom renovation would suddenly cost $6,250, but the nation's debt would stabilize and everybody could see a doctor.
Sales Tax Gains Momentum

Burman, who helped House Democrats craft an unsuccessful 2007 plan to repeal the alternative minimum tax, said he's received a number of phone calls from lawmakers interested in his idea, though "they can't quite imagine how to make it happen politically." Burman said the 25 percent rate has caused some sticker shock, and he's trying to figure out how to bring it down.

Graetz's proposal drew an endorsement from Volcker, who last year called it "a sensible plan for reform." (Volcker did not respond to a request for comment.) It also has piqued the interest of Conrad, the Senate Budget Committee chairman who argues that it could be modified to accommodate Obama's pledge not to raise taxes on families who make less than $200,000 a year.

"I think interest is quietly picking up," Graetz said. "People are beginning to recognize that the mathematics of the current system are just unsustainable. You have to do something. And a VAT has got to be on the table if you want to do something big and serious."

Still, the Senate Finance Committee declined to include a VAT among the options it is considering to pay for health reform. And even VAT supporters doubt the tax will find a place among the tax-reform proposals the Volcker panel has been asked to produce by Dec. 4.

Though the nation's fiscal outlook is grim, Burman said "the situation will have to get more desperate" before lawmakers are likely to consider a new levy aimed directly at the pocketbooks of every one of their constituents.

Most lawmakers are still looking for "a painless source of revenue" to overhaul the health-care system and dig the nation out of debt, Burman said. "Who knows?" he added. "Maybe the tooth fairy will bring that to them."

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Health-Care Overhaul Could Be Funded by Levy on Employer-Paid Insurance Premiums

By Lori Montgomery
Washington Post Staff Writer
Friday, May 22, 2009

A new tax on employer-provided health insurance is emerging as a likely option to finance an overhaul of the nation's health-care system, key Democrats say, despite opposition from organized labor and possibly the Obama administration.

Critical details have yet to be resolved, including whether to tax the benefits of all workers regardless of income and what portion of their employer-paid insurance premiums to tax. But the idea won a surprising degree of acceptance during a closed-door meeting of the Senate Finance Committee this week, according to several people present. And once-fierce opposition among House Democrats is softening as lawmakers confront their limited options for raising the estimated $1.2 trillion that will be needed to pay for reform over the next decade.

"There's a strong sentiment that still exists in the House" against taxing employer-provided benefits, said Rep. John B. Larson (D-Conn.), a member of House leadership who sits on the tax-writing Ways and Means Committee. "But we understand how important it is to get a package through."

Implementing such a tax would create a tricky political situation for President Obama, who last year spent millions on campaign ads that harshly criticized a similar idea advanced by his Republican opponent, Sen. John McCain of Arizona. But while continuing to express opposition to the proposal, White House officials have repeatedly stated that all financing options are on the table. And some Democrats are already calculating how to explain a reversal.

That task may have been made easier this week when congressional Republicans proposed using the tax to finance their own health-reform blueprint, lending the idea a bipartisan stamp of approval.

Excluding employer-provided benefits from taxation "is one of the distortions in the health-care marketplace that needs to be fixed," said Rep. Paul D. Ryan (R-Wis.), one of the plan's authors. "It was put in place in the mid-20th century when everyone had the same jobs for most of their lives. And we don't live like that anymore."

According to U.S. Census data, 177 million Americans received health insurance from their employers in 2007, the most recent year for which data are available. Nearly two-thirds of people under 65 have at least some of their insurance premiums paid by their own employer or that of a family member.

Under current law, those benefits are not taxed as income, one of the largest loopholes in the U.S. tax code. If the loophole were eliminated, congressional tax analysts estimate that the IRS would have collected an extra $133 billion last year alone.

Senate Finance Committee Chairman Max Baucus (D-Mont.), who expects to unveil health-reform legislation next month, has said he is not interested in closing the loophole, but in establishing limits. Among the options: Taxing only the benefits of high-earning individuals who make at least $200,000 a year ($400,000 for families). Or taxing benefits for all workers above some pre-set amount. One figure under discussion is $13,000, the national average value of employer-provided coverage for families.

Both options have disadvantages. Taxing only wealthy families, for example, "doesn't make sense," said Sen. John F. Kerry (D-Mass.), because it would raise too little money -- only about $160 billion over 10 years, according to Finance Committee aides. But "you've got to be very careful how far you go" down the income ladder, Kerry said. "If you come down too low, you're impacting workers and threatening the employer-based system."

Some Democrats are particularly concerned that the tax would fall heavily on union members, who tend to have generous health packages sometimes derided as "Cadillac" plans. But those plans are expensive because they include dental and vision benefits, large provider networks and low co-payments -- "things every American wants and should have," said Richard Kirsch, national campaign manager of Health Care for America Now, a coalition of unions and community organizations. Kirsch yesterday endorsed an alternative tax plan drafted by Citizens for Tax Justice that would target corporations and the wealthy for $1 trillion in tax increases over the next decade.

Capping employer-provided health benefits would generate around $500 billion over the next 10 years, by various estimates, and key Democrats say it may be the only politically viable option for raising that kind of cash.

"Everyone hates it," said a member of the House Ways and Means Committee, speaking on condition of anonymity because he has yet to discuss the issue with his colleagues. "But where else do you go?"

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MICHAEL HILTZIK
He promised to make it work by cutting 'waste, fraud and abuse.' It was never that easy. The real solutions are obvious, though.
May 21, 2009|Michael Hiltzik

Marx Brothers fans will recall that the political philosophy of Rufus T. Firefly in "Duck Soup" boiled down to this:

"If you think this country's bad off now, just wait 'til I get through with it."

I've often considered that to be the secret slogan of Arnold Schwarzenegger's administration. (Just substitute "this state" for "this country.") After Tuesday's election, it's no longer a secret.

Schwarzenegger had the kind of voter support in 2003 that would have allowed him to tell the voters the harsh but necessary truths about California governance and force real reforms down their throats.

Instead, he uttered the same lies about state government and proposed the same nostrums as many of his predecessors: Californians are overtaxed and underserved, the budget can be balanced by cutting waste, fraud and abuse, etc. Like everyone else who has made these claims, he never delivered on his promise.

His cut in the car tax cost the state $3.6 billion per year, making him directly responsible for pretty much all of today's $21-billion budget deficit.

He hoped he could avoid reaping the whirlwind sown by these cliches. Unfortunately, Tuesday was Harvest Day.

Let's list a few of the lies he and our other political leaders have peddled about California's government and examine how they contributed to this week's debacle at the ballot box.

The most onerous lie is that Californians are burdened by the highest state taxes in the nation. The truth, according to 2006 figures derived from the U.S. Census, is that as a percentage of all personal income, California's tax and fee schedule ranks 18th in the country.

Then there's the canard that we unfairly soak our rich. This is supposedly a no-no, because the rich might flee, taking with them their sterling job-creating potential.

The dirty little secret, according to Citizens for Tax Justice, a left-leaning nonprofit group, is that California's wealthiest residents shoulder the lightest burden of any income group in the state. The top 1% of California income-earners (average 2007 income: $2.3 million) paid 7.4% of their income in various state taxes last year, counting the federal deduction for state taxes. The highest rate was paid by the poorest residents. Those earning $20,000 or less, with average income of $12,600, forked over 10.2% of their earnings in sales, excise, property and other levies.

This year's budget deal increased the disparity, raising the effective rate on the rich to 7.8%, but that on the poor to 11.1%.

The theme of the ballot campaign was that the state's chronic budget gridlock could be solved by more gridlock and more borrowing. All lies.

By no means does the governor deserve all the blame for the budget fiasco. Democrats and Republicans alike have abandoned any claim to statesmanship in Sacramento.

And what of the business community? Big corporations, entrepreneurs and mom-and-pop stores all have a huge stake in functional state government.

Yet the state Chamber of Commerce traditionally has offered one nostrum for California's budget ills: Cut taxes. But since it also claims to support better education and improved infrastructure, its approach has simply amounted to throwing the hard challenges back into the laps of a nonfunctional political establishment.

The truth is that real solutions to the budget crisis are obvious.

One: Eliminate, or at least loosen substantially, the two-thirds legislative requirement to pass a budget or raise taxes.

This rule has allowed a small Republican minority to hold up all budget progress unless its reactionary program is incorporated in the deal. If the supermajority were pared back even to 60%, the minority lawmakers would be unable to block a budget unless they could enlist at least a few moderates in their cause. The improvement in the tone of legislating would be immediate.

Two: Remove legislative term limits. This ridiculous provision has reduced the Capitol to a nursery full of would-be legislators needing afternoon naps. Worse, it has sapped legislative leadership of its vigor.

Since mid-1995, there have been nine speakers of the Assembly. Over the previous 20 years, there were two, including Willie Brown, the original target of the term-limit movement. You want to tell me that government in Sacramento has improved since then? As long as term limits exist, we'll never have a 21st-century state government.

Three is the Big One: Revise Proposition 13. Prop 13 is often described as a tax-cutting measure, but that scarcely does justice to the damage it has caused.

By rendering the property tax useless as a revenue device, Prop 13 hit local governments especially hard. Key budgeting authority devolved from cities and counties up to Sacramento, where they have to compete with the state government for money. You want your streets paved or more teachers for your third grade? Stand in line behind the health department, or the corrections department, or Caltrans.

So city streets deteriorate and local schools get worse. Police and firefighters are laid off. All the places where the voters come into face-to-face contact with their governments crumble.

The result? Voters get more cynical, more convinced that government is expensive and useless. It's a vicious circle -- the more government is unable to do the things voters want it to do, the less faith the voters have in government and the less they're willing to spend on it. Which leaves it with less money to do the things voters want. And on and on.

Reversing the worst effects of Proposition 13 doesn't take rocket science. Commercial property should be subject to regular reassessment -- the "split roll" that, inexplicably, can't gain traction in Sacramento. Cash-strapped homeowners can be provisionally protected from the burden of higher residential assessments -- say by allowing some assessments to be deferred until the home is sold.

Plainly, local government needs to recover its authority to collect revenue directly. That would help our political leadership make the case that, considering the quality of the services and institutions state and local government provide, Californians aren't overtaxed but undertaxed -- and the wealthy are the most undertaxed of all.

If Tuesday's election proves anything, it's that California's political sacred cows all need to be herded into the abattoir and dismembered, once and for all.

Breaking the cycle that has brought us to this pass will take political courage and real statesmanship. California's voters have been trained for too long to think they can have roads, schools, universities, clean air and other amenities without paying their true cost. The task of our next generation of leaders will be to show that California is not ungovernable -- it's just been ungoverned.

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May 21, 2009

By DAVID CAY JOHNSTON

IN December, Joe and Nancy Briggs sat down in their home on Lake Canandaigua in western New York to take a hard look at their donations to charity. Their investments, like those of almost everyone else, were shrinking just as the pile of requests from charities was expanding.

“When things go down, no matter how much you have, you think you are poorer and therefore your tendency is to withdraw completely,” said Mr. Briggs, a retired legal-publishing executive. “The problem is that this is the time when you can do the most good, when you really need to give.”

So the Briggses changed their giving priorities, at least until the economy recovers. What they devised was a strategy to fit the needs of the times. “We cut back a little on some agencies, like art galleries,” Mr. Briggs said. “I sent a note with each check saying we were cutting them back so we could give more for things like food banks, where they really need the money right now.”

Over all, the worst economy since the 1930s has halved many stock portfolios. Bailouts have put bonds at risk of inflation. And even the best jobs no longer seem secure. On top of this, many prosperous Americans find themselves helping grown children and other relatives who are out of work through no fault of their own. A third of the jobless do not qualify for unemployment benefits.

Many charities face not just tough times, but disaster. At some organizations, volunteer trustees, especially those on the finance committee, have grown accustomed to monthly projections of income and expenses that are soaked in ever more red ink.

Nationwide, charities are reporting that donations are flat to down sharply, especially for organizations that rely on gifts of appreciated stock. This year, Americans are likely to harvest $426 billion in capital gains, less than half of the nearly $875 billion harvested in 2007, according to Citizens for Tax Justice, which calculated its own figures after the Congressional Budget Office decided in January not to issue its annual estimate.

Universities and community foundations have seen their endowments ravaged, meaning they have less to give. The United Way, whose network of local organizations raises money mostly for social services, youth and health, has seen drops in donations across the country.

WITH tax revenues falling, governments are tightening up on contracts with nonprofits and delaying or canceling new grants even though pleas for help are rising among social service agencies.

In this environment, your past generosity makes you appealing to many organizations, regardless of what your investment statement says this month. As requests pour in, the combination of shrinking net worth and job uncertainty can be immobilizing.

What’s a donor to do?

For starters, think like Joe and Nancy Briggs. Instead of reacting, they acted, focusing on how to do the most good given the economy.

Peter Frumkin, a sociologist at the Lyndon B. Johnson School of Public Affairs at the University of Texas, says donors operate from either of two “master theories of giving.”

“One theory is direct service to individuals; the other is change through advocacy and public education,” said Professor Frumkin, the author of “Strategic Giving.”

“In tough times,” he said, “people tend to gravitate toward direct service because they want something concrete from their giving.”

Direct service, he added, “is like buying bonds, and advocacy like growth stocks, and so in tough times donors rebalance their giving portfolios into safer investments.”

Assuming you still have the capacity to give, three techniques you can consider are conversion, deferral and triage.

Conversion is a strategy for those who have a multiyear pledge to an endowment of a charity that needs operating cash now. Endowments are intended to build long-term stability, but without money now an organization or other agency could be forced to curtail operations sharply or to close.

In a conversion, you propose that this year’s endowment gift go all or in part to operating funds the charity can spend immediately. Because pledges can be enforceable promises, make sure that you get a written agreement that you are either reducing your commitment to the endowment or are extending the payment period.

If the market has done more than just batter your portfolio, or job, you may need to delay your gift.

David A. Handler, a trusts and estates lawyer with Kirkland & Ellis in Chicago, said that “a lot of nonprofits are used to hearing at this point” from donors who need some forbearance.

The way to raise the issue, Mr. Handler said, is by noting that “my commitment to you remains intact, but I don’t have liquidity right now; when we have it my gifts will resume.”

Some fund-raising executives may press for a more specific timetable. How long it will take for the stock market to recover is speculation, but Allen Sinai, chief economist at Decision Economics Inc., told clients that he thought the market had begun to recover. He cautioned, however, that “our expectation is for a very muted bull market because the U.S. will not produce much in the way of capital gains realizations,” in part because investors have so many losses they can use for tax purposes to offset future gains.

Julie A. Lucas, an assistant dean who raises money for Fordham Law School in New York, said that “people are really thinking more carefully about what they will support, and while they may have supported a broad range of causes before, many are now giving less to each or giving to fewer organizations.”

Proposing to extend a three- or five-year pledge to seven years, Miss Lucas said, “can bring this sigh of relief, and they say, ‘That would be fantastic,’ because 9 out of 10 expect the economy to come back and they just need some extra time.”

The third technique is triage: separating out charities that will not survive without your support, and trying to assess whether they are worth saving. Letting some nonprofits go out of business troubles many donors, yet it clears out duplication and inefficiency, as well as organizations whose time has passed.

AS executive director of the Community Resource Exchange, which provides management and technical advice to nonprofits in New York City, Fran Barrett acknowledges that she has seen “quite a few” nonprofits that are “badly managed, not current, or offer mediocre services.” But these, she said, are far fewer than those that “are really providing excellent service, at very low costs.”

Focusing on larger agencies, she said, “is like saying you only eat Italian food at Olive Garden. On that approach the local chef with his own place and passion for Northern Italian cooking would not survive.”

She added, “Donors need to think carefully about scale because the larger-is-better model isn’t always the best.”

Professor Frumkin, the sociologist, said few donors would openly risk letting a smaller nonprofit fail by withdrawing support. Instead, he said, they tend to change larger gifts into what he calls “nuisance grants.”

“Individuals donors have a harder time turning off the spigot,” he said, “so they will send a small check, $100 instead of $1,000, rather than say no.”

In a way, that sort of cutback is what the Briggses did. They cut back on organizations they thought would survive without their help or fail even with it, and focused on organizations they were concerned would be overwhelmed with need, like food banks.

“This is the time people need the money, now when things are so bad,” Mr. Briggs said, “and whether you are feeling poorer yourself doesn’t matter so much as when money was really needed you were there to help.”