This post was originally written for Americans for Tax Reform, where I was an Associate (intern):
Title 1, Subtitle D of the Senate Finance Committee’s Chairman’s Mark establishes “Shared Responsibility” requirements for individuals and employers. For employers, this requirement entails a tax linked to the number of their employees receiving subsidies in the General Fund.
For each full time employee (defined as working 30 hours or more each week) enrolled in a state exchange and receiving a tax credit, the employer would be required to pay a flat dollar amount… equal to the average tax credit in the state exchanges.
The tax is no doubt intended to strong-arm employers into providing insurance. But what does it actually do? In essence, the fine punishes employers who hire low-wage employees. The value of subsidized employee’s productivity decreases by the amount of the tax the employer is expected to play – so their market wage will drop by the same amount. If this wage falls below the minimum wage – likely, because their wages are already low – then many employers will simply fire them.
Realizing this dilemma, the tax planners attempt to “fix” this problem with an arcane tax cap:
The assessment is capped for all employers at an amount equal to $400 multiplied by the total number of employees at the firm (regardless of how many are receiving the state exchange credit).
Baucus’s planners provide a helpful scenario to demonstrate how the cap will affect incentives:
For example, Employer A, who does not offer health coverage, has 100 employees, 30 of whom receive a tax credit for enrolling in a state exchange offered plan. If the flat dollar amount set by the Secretary of HHS for that year is $3,000, Employer A should owe $90,000. Since the maximum amount an employer must pay per year is limited to $400 multiplied by the total number of employees (for Employer A, 100), however, Employer A must pay only $40,000 (the lesser of the $40,000 maximum and the $90,000 calculated fee).
Because the employer is paying a $400 penalty per employee, rather than a $3000 penalty per subsidized employee, the employer has no specific incentive to decrease the wages of subsidized workers. Problem solved, right? Wrong.
Now the employer has an incentive to lower the wages of all of his workers (or fire them if they are already at minimum wage). Instead of “fixing” the costs created by the original tax, the government planners have spread it across a new group of employees. The tax penalty is of course lower – but this simply means it will be less successful in achieving its questionable objective.
And what if the company in the above example had only 13 workers receiving subsidies? Then the penalty paid would be $39,000 (13 subsidized employees times the $3000 average tax credit, which is less than the $40,000 cap). Now of course, the incentive is to decrease the wages or fire only the subsidized workers. And because the tax is higher, it affects each of these subsidized (and therefore “low-wage”) workers more strongly.
Other costs abound. Because the fee is applied only to subsidized employees working for more than 30 hours a week, companies can dodge the fee by reducing these employees’ hours. Only companies with more than 50 employees are subject to fees, so companies have an incentive to reduce the scale of their operations, or to spin off part of their business as a smaller subsidiary. Seeking these new arrangements bears a cost on the company and the economy at large. Even determining what arrangement is most efficient bears a cost on a company – even if it ultimately decides the best option is to provide health insurance!
The tax planners have attempted to “fix the market’s behavior, and then fix the perverse consequences of their original intervention. Inevitably a new perverse consequence is created. All of this for what? Wages are determined by productivity – this measure only strong-arms employers into offering compensation in a less liquid form than cash. However undesirable the other health care goals of central planners may be, none of them require an employee mandate. Planners could just as easily force citizens to buy health care with an individual mandate – then consumers would have at least the option of directly picking their preferred level of insurance. Community rating, guaranteed issue, pre-existing coverage, and deductible caps do not rely in any important sense on an employer mandate. Only Baucus’s arbitrary desire that employer insurance dominate the market is satisfied by this harmful web of byzantine regulations. Employers, workers, and taxpayers, as usual, are left with the bill.