(Original Post)

Pittsburgh Tribune Review

January 31, 2010 Sunday

Union health care exemption bill under microscope

by Joe Napsha

The political deal that would give labor union members a five-year exemption from paying taxes on more-expensive health care coverage — as proposed under a Senate health care reform bill — is catching flak from all sides.

The White House, in a political compromise to win passage, recently reached an agreement with labor leaders and Senate Democrats to consider revisions in the Senate bill to exempt union members until 2018 from paying a 40 percent tax on the value of any health insurance plan.

Other workers would have to pay the excise tax beginning in 2013 on the value of any health coverage premiums above a certain level.

"It's a tremendously bad proposal. You should not give a kickback to one group," said James Sherk, a labor expert with the conservative Heritage Foundation in Washington.

The health insurance tax, which the Citizens for Tax Justice predicts will affect 58 million people by 2019, is being proposed to fund health care reform provisions. Exempting union members for five years might cost about $30 million.

Giving labor unions a one-year window to renegotiate existing labor contracts to alter health insurance plans might be fair, but there is no need for five years of tax-free benefits, he added.

The United Steelworkers union, which has about 850,000 members, is supports efforts to lessen the blow of health care costs to its members, but it does not favor a tax on any worker's insurance, said Connie Mabin, a spokeswoman for the Pittsburgh-based union.

"Our union prefers that no benefits are taxed. We continue to fight for real reform that includes those principles and doesn't hurt the middle class," Mabin said.

The Kaiser Family Foundation estimated that average annual premiums in 2008 were far below the taxable threshold for both single and family coverage for both union and nonunion workers. The foundation estimated that single coverage for a union member averaged $4,836, just $200 more than the nonunion worker; and $13,009 for union members, just $500 more than for nonunion workers.

The USW has conducted research on the cost of health care for its members, but is keeping those results in-house as the debate unfolds, Mabin said.

Health insurer Highmark Inc. in Pittsburgh has not determined the potential impact of proposed health care reform on premiums, or average costs of plans for union and non-union employers because there are so many variables, spokesman Michael Weinstein said.

"It would be impossible at this point," because each plan in different, Weinstein said.

The tax on the benefits is being considered as a method of paying for the health care reform, said Paul Fronstin, director of the health care program at the non-profit Employee Benefit Research Institute. The institute, based in Washington, is nonpartisan and supported by businesses, unions, benefit consultants and health insurance companies.

One of the reasons the issue of taxing health benefits has arisen is because health care insurance provided by employers is considered "a tax-free benefit without limit," Fronstin said.

As distasteful as taxation is, Sherk said that if the government needs to raise money to fund health care reform, the Senate's plan is a much better than the House's proposal to levy a 5 percent tax on small businesses offering health insurance.

"That's a disincentive to create jobs," and that will do greater harm to the economy, Sherk said.

Taxing all employees on the value of their health insurance would be a more fair method, and may even lead to better use of the health care system, Sherk said.

That may motivate employers in nonunion businesses to keep insurance premiums below taxable levels, said Lorin Lacey, principal for the health and productivity practice at Buck Consultants LLC, a human resources consultant in Pittsburgh.

National Journal's CongressDaily

January 29, 2010 Friday

S Corp. Proposal Draws Interest, Ire

by Peter Cohn

Charges of "tax-dodging" that dogged former Sen.John Edwards, D-N.C., during the 2004 presidential campaign have emerged as a behind-the-scenes issue as Democratic leaders attempt to revive a fully paid-for healthcare bill.

The Edwards comparison is a result of a proposal to raise money by applying the Medicare payroll tax, which currently only applies to wages, to investment income as well. The tax would hit individuals making more than $200,000 or households above $250,000.

House-Senate negotiators are debating whether the tax should apply to income that is passed through to shareholders in a business structure formed under subchapter S of the tax code. Seemingly an arcane accounting issue, the answer could mean the loss or gain of as much as $40 billion in revenues to pay for subsidies to help low-income individuals and families buy health insurance.

S corporations are generally privately owned businesses with a small number of shareholders, whose income is taxed at the individual level in the form of dividends, not wages.

Senate negotiators want to keep active S corporation income -- other than income from passive investments -- exempt from the payroll tax, fearing their chamber's fragile voting math can ill afford what could be seen as a new small business tax, aides said. House lawmakers disagree, citing the revenue loss, relatively few actual small-business employers that would be affected, and potential to game the system -- such as opting for S corporation status simply to avoid the tax.

That's where Edwards comes in: When he earned $26.9 million as a trial attorney in 1995, his firm's S corporation status enabled him to avoid paying $591,000 in payroll taxes for Social Security and Medicare over the next four years. As a partner in his firm, Edwards paid himself a salary of $360,000 a year, which was subject to payroll taxes -- but the remaining $25.5 million he earned was not. TheWall Street Journaleditorial page called it the "Liberal Loophole," and progressives have argued for years that S corporations enable the rich to dodge their fair share of social insurance taxes.

The Joint Committee on Taxation recommended tightening S corporation rules in 2005. Earlier this month, GAO found that underreporting of S corporation income has led to billions of dollars a year in lost revenues. Given that report, "a special carve-out for them here would seem to move in the wrong direction," said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities.

"This is one of the biggest loopholes we have," added Citizens for Tax Justice Director Robert McIntyre, whose group put the investment tax idea on the radar. "If you set up a subchapter S corporation, you can argue that you are really not worth that much, and only pay yourself a small salary. Look atJohn Edwards... this is a notorious problem in the tax code and it ought to be fixed."

Small business advocates argue the tax will not just hit the Edwards types. Dena Battle, director of tax policy at the National Association of Manufacturers, said S corporations are employers and provide much of the job-creation, if any, that is taking place.

"When you run a business, it's never quite that simple; you're not just paying yourself, you're raising capital, making investments and hiring," she said. "They're literally putting their homes on the line. The level of risk is really amazing. ... That's exactly what we need in this economy, people who are willing to take those kinds of risks."

Typically, investment income is defined as capital gains, taxable interest, dividends, estate and trust income, and income from rents, royalties, partnerships and S corporations.

According to preliminary estimates, dropping active S corporation income from the tax would sacrifice about $40 billion in revenues, although it would still raise $84 billion over a decade. Including pass-through income earned by lawyers, physicians and others who have opted for S corporation status -- but not small-business owners in the traditional sense -- could raise $104 billion. Including all S corporation income would bring the total to about $125 billion, revenues that House progressives are eyeing.

Small-business advocates don't like the idea of a new tax on S corporations and would like to knock out the investment tax altogether. Several trade groups, including NAM, the S Corporation Association and National Federation of Independent Business, penned a letter to congressional leaders Thursday arguing their case.

"As organizations representing Main Street businesses with millions of middle-class workers, we are writing to express our intense opposition to any effort by Congress to apply payroll taxes to non-wage income," they wrote. "[T]his new tax increase would strike at the heart of the employers who are struggling to increase savings and productivity, hire new workers and reduce double-digit unemployment, and help lead us out of this recession."

The letter argues that the proposal undermines the concept of social insurance taxes, which are based on the premise that workers' wages earned over a lifetime will go toward an entitlement when they retire. If nonwage income is taxed, Medicare would become just another "welfare" program, the letter states. They also said it would undermine the Medicare trust fund by diverting money to other purposes.

Advocates for closely held businesses on both sides of the Capitol are wary of the proposal, including S corporation boosters like Rep.Ron Kind, D-Wis., a New Democrat and member of the Ways and Means Committee.

"I just think there are better pay-fors than going after investment income, things that we need to be able to grow the economy right now," Kind said. "But at the end of the day, it's got to be paid-for. And that's the hard part ... I wish my Republican colleagues had lived under that philosophy for the previous eight years when they were passing huge spending bills, unpaid-for and driving us further and further into debt."

National Journal's CongressDaily

January 6, 2010 Wednesday

Dems Eye Investment Income As Pay-For

by Peter Cohn

Democrats are taking a second look at subjecting investment income earned by wealthy Americans to the Medicare payroll tax, as they hunt for healthcare revenues to whittle down an excise tax on high-cost insurance plans in the Senate version.

The Senate proposal has come under fire from labor unions and progressive groups. Robert Reich, who was Labor secretary in the Clinton administration, came out against the tax plan today in a conference call.

"The choice here is very clear: Congress should put the cost of healthcare reform on the wealthiest Americans ... rather than working Americans who are struggling harder than ever," Reich said.

The Senate provision in its current form would raise taxes on millions of middle-class Americans by 2019, according to the Joint Committee on Taxation, breaking pledge President Obama said at the time he would leave individuals earning less than $200,000, or households with less than $250,000 in annual income, untouched. He also said he would not tax health benefits to pay for reform, as his opponent Sen.John McCain, R-Ariz., proposed.

But Obama  in recent days has forcefully advocated for the excise tax as among the best options for holding down healthcare cost-growth over the long term.

The idea of applying the Medicare payroll tax to investment gains and other "unearned income," as advocates of the plan call it, has been circulating for months. It was put forward by Citizens for Tax Justice, a progressive group, over the summer, and Sen.Debbie Stabenow, D-Mich., raised it in initial Senate Finance Committee deliberations. It came up again in early November as Senate Majority Leader Reid was cobbling together a combined Senate bill.

Reid eventually settled on a straight increase in the 1.45 percent tax paid by employees to 2.35 percent on individuals with more than $200,000 in adjusted gross income and families making more than $250,000.

Rep.Chris Van Hollen, D-Md., assistant to House Speaker Pelosi, said a similar approach could be taken in final House-Senate negotiations, while other sources said the House also may be willing to sign off on a version of Stabenow's plan.

Currently, the wealthiest earners contribute a much smaller percentage of their income to payroll taxes for Medicare and Social Security -- about 1.6 percent in 2006 versus 9.4 percent for the middle class, according to CBO.

Stabenow obtained a score of her plan in early December that gave some indication of how much revenue may be available. According to JCT, applying the existing 1.45 percent payroll tax to investment income, including capital gains, taxable interest, dividends, estate and trust income and income from rents, royalties, S corporations and passive partnership income, to those earning above the $200,000/$250,000 thresholds would raise $111 billion over a decade.

It would be phased in over the first $40,000 of investment income, and begin Jan. 15. Arguably that date would have to be moved back, decreasing the amount of revenue gained. But increasing the overall tax by 0.9 percent, as the Senate bill would do, could make up some lost ground. Simply increasing the tax on current income, applied only to wages and beginning in 2013 as in the Senate bill, would raise about $87 billion.

Rep.Joe Courtney, D-Conn., who has led the charge in the House against the excise tax, declined to handicap the outcome on the call with Reich but pledged to keep up the fight. "The Obama campaign was not bashful at all about going after McCain's throat on that issue," he said, adding "this is a plan that has great political risk for the Democrats."