Obama healthcare playbook getting thin

July 13, 2009

James Pethokoukis – James Pethokoukis is a Reuters columnist. The views expressed are his own —

The playbook is getting pretty thin for the Obama White House and congressional Democrats. One big idea they had to pay for healthcare reform was by capping itemized tax deductions for upper-income taxpayers. But the charities and nonprofits who benefit from these deductions screamed to Capitol Hill, so that approach was shelved. Time for Plan B.

Then congressional Democrats considered removing or capping the tax-advantaged status of job-based healthcare benefits. These untaxed benefits mean workers pay very little of their healthcare expenses out of their own pockets, which, in turn, means they aren’t motivated to act like true, cost-conscious consumers.

Whatever else its merits, this change would have been a step toward signaling to workers the true cost of their job-based healthcare plan by reminding them that their income funds the purchase of those health benefits. Higher benefits means lower wages.

But it turns out that this idea isn’t very popular with voters who are being asked to give up money today for the promise of lower healthcare costs tomorrow.

So how to pay for a plan that could cost $1.5 trillion over the next decade? Time for Plan C.

Now congressional Democrats are floating the idea of a surtax on wealthier Americans. Actually, this would kind of be a second surtax. During the presidential campaign, Barack Obama said that some of the revenue gained by letting the 2001 and 2003 Bush tax cuts expire for those folks at the end of 2010 would help pay for healthcare reform.

So on top of that $500 billion (over ten years), you can tack on, perhaps, another $300 billion. While this might make the tax system more progressive, it leaves in place the free-lunch illusion surrounding worker healthcare benefits (though they do play premiums, of course.)

In addition, it is a de facto further hike in marginal tax rates during an economic downturn that is far worse than Team Obama expected. That comes in addition to plans to raise investment taxes, corporate taxes, and energy taxes. And, of course, some of the so-called wealthier Americans are small business owners. While most owners would be not affected, the majority of small business profits would face the higher marginal rate.

The weak economy is making the American public rightfully more skittish about paying higher taxes, whether for reforming healthcare or dealing with climate change. And if unemployment keeps rising, calls for a pricey second stimulus package might might make healthcare seem like an expensive indulgence that can wait until 2010 or beyond.

At least that will give the Obamacrats more time to think about how to come up with that $1.5 trillion.

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