A reality check on financing Green Mountain Care?

The Shumlin Administration has refused to release draft financing plans that would show how to raise the estimated $1.7 billion to $2.2 billion to finance the future public Green Mountain Care health insurance program. However, we now have an estimate from the Joint Fiscal Office of the Legislature that shows which taxes might be used to raise $2 billion for it. This was requested by Senator Peter Galbraith for illustrative purposes. It is very basic, but it gives an idea of the tax changes involved in shifting from private insurance to publicly financed insurance.

It is important to note that this added tax revenue would replace the premiums and other costs that Vermonters with private health insurance pay now. This is substitution, not adding taxes to premiums. As you read this it might be useful for you to think about what you, your family, and your business may now pay for health insurance and health care as you compare it to how various tax increases might affect your situation as they replace premiums and cost sharing.

It is clear to me from an initial review that some will pay more, some will pay less, and some will pay about the same. If you look at these rates and determine that you might pay less, then some other Vermonter would be paying more. In addition, we would likely all have the same benefits package, so we could not alter the taxes to be paid by switching to a different plan with different premiums.

There are four taxes that can raise $2 billion or a large part of that amount. These are a payroll tax, the income tax, the sales tax, and a per person mandatory premium. Below I will first show the rates required if all the revenue were raised from each particular tax in turn. Then there is an analysis of raising a quarter of the revenue from each of the four taxes all together.

The rate numbers are from the JFO chart, but I include my own explanations - anything in parentheses or brackets is from me. I show an estimate of what individual Vermonters at three different income or wage levels would pay in additional health system taxes under the different scenarios: Vermonter A at $25,000 income or wages, Vermonter B at $50,000, and Vermonter C at $100,000. This is hard to do, and sometimes I have good calculations and sometimes I am just "guesstimating." I hope it is useful and I welcome corrections or clarifications.

Using just one tax to raise $2 billion, listed in turn:

Using just the payroll tax through businesses, we would need a rate of 17 percent. (From current 0 to 17 percent - in the estimate this is capped at $113,700 and it would apply to self employed income. Sometimes a payroll tax is truly borne by the employer, and the added cost per employee can discourage hiring more workers, and it can cause price increases for customers. Quite often the cost of this tax is basically shifted onto workers in the form of lower wages or reductions in other benefits to offset the extra cost. So a payroll tax imposed on businesses does not necessarily mean that businesses ultimately pay the tax. ) [Whether really paid by the employer or the employee NEW health system payroll taxes: Vermonter A: $4,250, B: $8,500, C: $17,000]

Using just the income tax, we would have to add 30 percent to all rates, so the lowest bracket would have a rate of 33.55 percent, then 36.8 percent, then 37.8 percent, then 38.8 percent, and the highest rate of 38.95 percent. (From current 3.55 percent on income up to around $35,000, current 6.8 percent from about $35,000 to $85,650, current 7.8 percent from about $85,650 to $178,650, 8.8 percent from $178,650 to $388,350, and 8.95 percent on income above $388,350.

The income brackets given are for a single individual. In our state income tax system everyone pays the lowest rate on the first chunk of income, then the higher rate on more income, and so forth until the highest bracket. So the ultimate effective tax rate paid emerges from the application of the different rates to income tiers. ) [NEW health system income taxes added to existing tax payments - A: $7,488, B: $14,982, C: $29,982.]

Using just the sales tax, we would have to expand the tax to cover food and clothing and we would need to set the overall rate at 29 percent. (From the current 6 percent which exempts food and clothing. ) [How much of this tax would be paid depends on how much of income is spent on goods that are taxed, and lower income people tend to spend most of their income. Just as guesstimates for the sake of discussion, I will suggest that Vermonter A might pay $4,000 in NEW health system sales tax, B $8,000, and C $12,000? Some of the new sales taxes would be paid by out of staters.]

Using just a public premium, every Vermonter (man, woman, and child) not excluded from Green Mountain Care will have to pay an annual premium of $5,200. (Those covered by Medicare, Medicaid, and the Military Tricare are excluded. ) [A, B, C all pay the same NEW health system taxes of $5,200 as individuals, families would pay in multiples of $5,200 based on the number of people.]

Using all four taxes combined to raise $500 million from each to raise $2 billion:

A payroll tax of 4. 25 percent AND - [ NEW taxes - A: $1,100, B: $2,215, C: $4,250]

A 7.5 percent increase in the marginal rates in the income tax, so that the lowest rate is 11.05 percent, then 14.3 percent, then 15.3 percent, 16.3 percent and the highest rate is 16.45 percent AND - [ NEW taxes from the increase of 7.5 percent - A: $1,988, B: $3,907, C: $7,617]

A sales tax of 11.75 percent AND - [NEW taxes - A: $1,300, B: $2,200, C: $3,500 - guesstimate]

A public premium of $1,325 per person. [A, B, C all the same NEW health system taxes of $1,325 each - more for families.]

Adding all these up, in NEW health system taxes, Vermonter A might pay about $5,713; Vermonter B might pay about $9,647; and Vermonter C might pay about $16,692. Remember that these new tax payments would replace premiums and cost sharing.

Such possible tax increases are only part of the story of GMC. We do not yet know the benefits package or the costs. These will be determined by the Green Mountain Care Board. It might be worth switching from premiums and cost shares to taxes if the coverage was better or the costs were better controlled. The problem for the GMC plan is that the more generous the benefits the higher the cost and the more tax revenue needed. There may be administrative cost savings from going to public financing, but they may not be as much as originally thought, and there will be added costs from the transition for software and management systems and cash reserves. In addition, it may be that the most promising health care cost savings will come through better coordination of care and payment reforms that can be done without changing to public financing.

Another problem is that in order to make health care financing more equitable, as the Administration claims to want to do, it will be necessary to shift some of the existing burden from low and middle income Vermonters to upper income Vermonters. (Right now low and middle income Vermonters tend to pay a larger percent of their income for health insurance and health care than upper income Vermonters. Very low income individuals are on Medicaid.) A financing plan that includes a large income tax component would be a way to do this, but Governor Shumlin has consistently opposed all reforms of the income tax that would increase the equity and effectiveness of that tax. Will there be political support for increasing progressivity - which means that those earning more contribute more towards health insurance than they do now? I generally support the principles of progressive taxation, but it is important to be straightforward about the implications of such a shift in financing for different Vermonters. The changes shown above are big changes.

It is also worth noting that after the implementation of the Federal Affordable Care Act, many low and middle income Vermonters already have better health insurance at lower cost due to the tax credits that subsidize premiums. Thorough income tax reform to ensure that all pay a reasonable share of the costs of financing state government as recommended by the Blue Ribbon Tax Structure Commission might be a better way to improve equity, rather than targeting health care costs alone through publicly financing health insurance.

If we are already getting closer to universal coverage and financing equity has improved, if we can make progress controlling costs and improving quality within our existing system, do we need GMC? Without concrete plans from the Administration it is hard to tell if the disruption and uncertainty would be worth it.

I believe that we can continue to work towards our health reform goals with more gradual and moderate methods than the GMC program. I would like to aim for a regulated and subsidized private insurance market like the Dutch or the Swiss system, alongside our existing public programs of Medicaid, Medicare, and Tricare. This would be an improved version of the system that we now have.

Cynthia Browning represents Arlington, Manchester, Sunderland and Sandgate in the state Legislature.


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