Rethinking Subsidies for Health Care

Gov. Arnold Schwarzenegger and Democratic legislative leaders Fabian Núñez and Don Perata have found common ground on the central goal of health care reform: to cover the millions of California workers and their families who don’t get health insurance through their jobs and can’t afford to buy it themselves. The harder part, to no one’s surprise, is agreeing on a way to pay for it.

The governor set out this year to take a big step closer toward universal health coverage by expanding public insurance coverage, requiring every Californian who is not eligible for public programs to buy private insurance and subsidizing premiums for low-income workers. He would pay the state costs for this expanded coverage by imposing new levies on doctors and hospitals and requiring firms that don’t buy health coverage for their workers to pay 4 percent of payroll into a state pool.

The plan recently passed by the Legislature also expands coverage (though not to everyone) but puts a heavier burden on employers. It would require them to pay at least 7.5 percent of payroll to insure their workers or pay an equivalent fee to the state.

Further burdening employers takes California down a dead-end street. Employers are already being crushed between swelling health insurance premiums -- up 78 percent from 2001 to 2007 -- and global competition from rivals whose health insurance systems are broadly financed. Ratcheting up the pressure on the firms least able to bear it won’t shore up a dying system and will only harm job creation.

To avoid loading new costs onto employers, the California Restaurant Association and other business groups propose instead to pay for expanded coverage by raising the sales tax. But raising the sales tax, a regressive tax, would take money from the very people health reform is attempting to help.

There’s a better way: California could pay for broader health coverage by redirecting the badly targeted health insurance subsidies it is already handing out.

Today, these subsidies, which flow through the income tax system, are topsy-turvy -- the Californians who need subsidies the most don’t get them, while those who get the most subsidies don’t need them.

Current law, both state and federal, excludes from taxable income the pay workers receive in the form of employer contributions to their health insurance. (If employers offer the option, it also excludes workers’ own contributions to an employer-sponsored health plan.)

The federal exclusion, which applies to payroll taxes and the income tax alike, kicks in with the first dollar a worker earns. But under California’s progressive income tax, the exclusion gives little or no health insurance subsidy to families at or below the state’s median income, including most of the uninsured, because most of them don’t pay income tax. The exclusion instead bestows a substantial subsidy on high-wage workers with good job-based health insurance, a subsidy that rises with income.

No one set out to design the system this way, but this is where we’ve ended up: California isn’t helping the uninsured waitress but gives its biggest health subsidy to the fully insured corporate executive she serves.

The topsy-turvy subsidy needs to be turned right. California could, for example, convert its health insurance exclusions, which currently cost more than $5 billion a year, according to Franchise Tax Board estimates, into a sliding-scale refundable health insurance tax credit targeted at households earning under $80,000, so we can help uninsured families afford the coverage health reform would require them to buy. We’d stop subsidizing health insurance for the CEO to make coverage available for the waitress.

To be sure, retargeting subsidies would be a delicate political task, but no more so than asking voters to pile new burdens on business, or raise the regressive sales tax. A big chunk of the money needed for health care reform is already in the system.

Schwarzenegger and Democratic leaders should look to that money first, and use it better and more fairly.