issue: Tax

The Dutch Try Something New: A Kilometer Tax

Posted on by The Progressive Policy Institute

The Netherlands has taken the plunge on a very good idea. The Dutch cabinet recently announced a new “pay-as-you-drive” tax plan.

The initiative, which is the first of its kind in the world and still awaits passage by Parliament, would introduce a three-cent tax for each kilometer driven in 2012, rising to 6.7 cents in 2018. But the tax won’t be uniform. It will be higher during rush hour and on cars that guzzle more gas. To somewhat balance out the new tax, the road tax will be eliminated and a new-car tax will be slashed.

Something like this has been proposed in the U.S. In February, Transportation Secretary Ray LaHood broached the idea: “We should look at the vehicular miles program where people are actually clocked on the number of miles that they traveled.” But that trial balloon was shot down by the White House before it was barely off the ground.

It’s a shame because it’s a concept worth taking seriously. The National Surface Infrastructure Financing Commission, also in February, released a report (PDF) endorsing a vehicle-miles-traveled (VMT) fee as the most viable approach to fund federal investment in our road infrastructure. Today, that investment is funded by gas taxes, but those haven’t been raised in years, and now generate about one-third of the funds necessary to keep the highway system from deteriorating further.

The tax would be adjusted based on factors like time of day, type of road, vehicle weight, and fuel economy. A GPS system would keep track of the information necessary to accurately charge taxes.

Aside from becoming a more stable source of infrastructure funding, the VMT fee would send market signals that could lead to quality-of-life improvements. Prices set higher during rush hour could prompt some people to make fewer trips, use more public transportation, do more telecommuting, and/or choose to travel at alternative times, easing traffic in the process. (A pilot VMT project in Oregon resulted in a 12-percent decrease in vehicle miles traveled.)

There are legitimate concerns about a VMT fee — privacy issues not the least among them (though those are addressed well here) — but the upside is too good for it to not be a part of the transportation policy conversation. Perhaps it will be once again if the Dutch experiment proves a success.

Is Reid Wobbling on the “Cadillac Plan” Tax?

Posted on by The Progressive Policy Institute

A New York Times editorial today threw its support behind a health reform provision that we’ve backed in the past: an excise tax on so-called Cadillac plans. But the Times‘ endorsement came on a weekend when prospects for the tax seemed to dim.

On Thursday, it was reported that Senate Majority Leader Harry Reid (NV) was considering raising the Medicare payroll tax on workers earning $250,000 or more to help pay for health care reform. According to one report, the idea being floated is a half-percent increase in the tax, to raise some $40 billion to $50 billion over 10 years. Another idea is to extend the payroll tax to capital gains and dividends from high-income earners.

Why the decision to tap into a new funding source for the reform package? One reason could be an effort to hike the Senate’s stingier (compared to the House bill’s) subsidies for low-income people. But a likelier reason could be, as the Times reported, an effort by Reid to cut back, if not outright eliminate, one of the Senate’s main financing sources, the excise tax.

If the payroll tax hike ends up replacing the excise tax, it would be an unfortunate development for reform. For months now, some powerful Democratic constituencies have been putting pressure on lawmakers to drop the idea. HCAN, a progressive health reform advocacy group, has come out swinging against it; the AFL-CIO has been running ads like this to scare the public and Congress.

But far from a tax that unfairly targets the middle class, the excise tax on high-cost health plans would actually be progressive. According to the Center for Budget and Policy Priorities, the “thresholds for the proposed excise tax are sufficiently high that most health insurance plans would not be affected.” Moreover, such a tax would go some way toward bending the proverbial cost curve:

The proposed excise tax would make a major contribution to slowing the growth of health care costs by discouraging insurers from offering, and firms from purchasing, extremely generous health insurance coverage that can encourage excess health care utilization. That, in turn, would reduce incentives for excessive health care spending.

As employers seek out cheaper, more efficient health plans, the savings then get converted into higher wages for employees. Indeed, according to the Joint Committee on Taxation, of the $201 billion in increased revenue the excise tax would bring, only $38 billion would come from the excise tax itself — the rest would come from increased payroll and income taxes from the higher wages and salaries that employees would be paid.

While an increase or expansion of the payroll tax for high-income earners might yield some new and badly needed funds for reform, it would not be a sustainable source, what with health cost inflation growing at a far faster rate than payrolls and the taxes levied on them. The fact is that the excise tax on high-cost health plans simply produces too many good outcomes — revenue generation, cost reduction, wage increases — for progressives to pass up, let alone oppose.

Labor and the Excise Tax on Insurers

Posted on by The Progressive Policy Institute

From today’s The Hill comes word that the AFL-CIO has fired another volley across the bow of Senate Democrats on the issue of the excise tax for high-cost health plans:

AFL-CIO President Richard Trumka warned Senate Democratic leaders not to include a tax on high-cost healthcare plans in a bill that is expected to reach the floor in coming days.

Trumka dismissed the notion that Democratic leaders could placate the powerful union by raising the threshold on plans that would be subject to the tax. Under the Senate Finance Committee’s bill, plans costing more than $8,000 for individuals and $21,000 for families would be hit with a 40 percent excise tax.

As others have pointed out, the tax-free status of employer-provided health benefits is a regressive relic that, in an ideal world, we would be jettisoning. Hardly an assault on that system, the Senate Finance Committee’s bill takes modest steps to chip away at it by levying an excise tax on insurers for so-called “Cadillac” plans. The tax would bring in about $200 billion through 2019, making it a vital source of funding for health care.

But labor remains unmoved. Trumka’s statement is only the latest salvo from the unions. In September, AFSCME President Gerald McEntee took to the pages of USA Today to argue against taxing high-cost insurance plans. The unions claim that any tax on such plans would harm middle-class families. Their concerns aren’t entirely unfounded. Middle-class workers in high-risk jobs or high-cost areas might meet the Finance Committee’s $21,000 threshold, making them subject to the tax. (The tax would be levied on insurers, but everyone acknowledges that it would get passed on to employees.) In addition, older workers are likelier to have high-cost plans, making them prone as well.

But a closer look at the Finance Committee’s bill shows that labor’s concerns are overblown. The legislation is studded with exceptions that aim to soften the blow to middle-class workers. For one thing, it sets the thresholds 20 percent higher in the most expensive third of states. In addition, workers in high-risk jobs or 55 and older have a higher cap.

Despite these exemptions, labor isn’t budging — and they have made their influence felt. Earlier this month, 154 House Democrats sent a letter to House Speaker Nancy Pelosi (CA) urging her “to reject proposals to enact an excise tax on high-cost insurance plans that could be potentially passed on to middle-class families.”

One of the striking things about the administration’s approach to policy has been its effort to include all the stakeholders on a given issue, and to urge them to make concessions for the sake of national interest. By making a stand on the excise tax, labor has shown a disappointing unwillingness to make sacrifices for the greater good. It would be a tragedy if reform floundered now because of the unions’ insistence on defending a regressive and unfair feature of our health care system.

Defusing the Debt Bomb

Posted on by The Progressive Policy Institute

When it comes to federal spending, America faces a dilemma that St. Augustine might have appreciated.

It was the young Augustine who prayed that God would make him chaste, only not now. Likewise, Washington must rein in its galloping deficits and debt, but not now — not when nearly 10 percent of Americans are jobless, long-term unemployment has reached new highs, and many have stopped looking for work altogether.

This isn’t the moment to impose fiscal austerity. But, as a group of smart Senate Democrats insist, it’s not too soon to start laying the groundwork for a return to fiscal responsibility once the economy recovers. Otherwise, our mountainous public debts will drain capital from the private economy and quite possibly scare off the foreign lenders who are keeping the U.S. economy afloat.

The Hill reports today that nine Senate Democrats and Independent Joe Lieberman (CT) have sent Majority Leader Harry Reid a letter urging him to set up a special legislative process to defuse the debt bomb. “We do not believe that action on these important issues will occur under the regular order in Congress,” they wrote.

The Senators, including such pragmatic progressives as Evan Bayh (IN), Mark Warner (VA), and Mark Udall (CO), are dead right. The key to getting Washington’s finances under control is curbing the unsustainable spending growth of Medicare, Medicaid, and Social Security. As entitlements, these programs grow automatically each year, propelled by medical cost inflation and the baby boom retirement. This happens by formula, outside of the normal Congressional budgeting and appropriations processes.

It’s instructive that the last serious effort at entitlement reform came in 1983, when President Ronald Reagan and House Speaker Tip O’Neill agreed to create a special panel (chaired by Alan Greenspan) to fix Social Security. They understood that lawmakers are unlikely to tackle the politically explosive issue of entitlement reform without both parties having skin in the game.

Other forward-looking Democrats, such as Sen. Kent Conrad (ND) and Rep. Jim Cooper (TN), have proposed a bipartisan commission to identify the spending and tax changes necessary to start winding down the nation’s deficits over time. The Obama administration would be wise to embrace this approach. It would be seen by investors here and abroad as a kind of promissory note, a sign that U.S. political leaders are determined to deleverage the federal government and boost national savings.

Some liberals dismiss worry about deficits (which reached an astronomical $1.4 trillion this year, up from $455 billion in 2008). They say Democrats ought to focus on creating jobs and speeding economic recovery, which means more government spending. It’s a false choice. Maybe we need to spend more — we’ll have a better idea once the original stimulus package is spent.

Even so, the U.S. cannot afford to let its national debt rise to 80 or even 100 percent of national output, as some budget experts predict. We can’t build lasting prosperity on fiscal quicksand.

So it’s not a matter of choosing between more Keynsian stimulus and deficit reduction, it’s a matter of doing both — and getting the sequence right. As the Senate pragmatists recognize, that means starting now on the difficult work of building a broad political consensus for modernizing the big three entitlements.