What Is an Excise Tax, and Can It Save Health Reform?

The Baucus proposal is, at long last, starting to snap into view. And it's ... pretty much what it was back on June 18, when an early outline emerged. Subsidies to 300 percent of poverty. Medicaid to 133 percent of poverty. Insurance market regulations. Prevention. Wellness. Exchanges. If no Republicans sign on to this bill, it will be hard to view the past few months as anything but wasted time in which the president's poll numbers got hammered and health-care reform became more difficult.

The big question, though, is how Max Baucus solves the money problem. Early word is that the plan will cost $850 billion to $900 billion. That's a lot of health care to fund. And the two largest potential sources of funding -- new taxes on income or a cap on the exclusion for employer health spending -- both seem DOA in Baucus's committee.

The answer, it seems, is an excise tax on insurance companies offering high-cost plans. The best way to explain this is that the American political system is a little bit stupid, and so we're going to do a good thing in an inefficient way in order to say that we're taxing insurance companies rather than workers, even though the end result will be the same.

The Center for Budget and Policy Priorities has a good explainer on how an excise tax would work. It gives this example:

Consider, for example, an excise tax of 35 percent on insurers offering family policies that cost more than $21,000. An insurer offering family policies that cost $21,000 or less would pay no tax. If a policy cost $22,000, the insurer would pay $350 (35 percent of the $1,000 excess over $21,000) per policy. For a policy that cost $25,000, the insurer would pay $1,400 (35 percent of $4,000).

What you'll notice is that that sounds a lot like capping the employer tax exclusion on plans that cost more than $21,000. In that case, those plans would cost more for the employer because they wouldn't be tax-free, and so the employer would either make workers pay more for them or steer workers toward cheaper plans. In this case, the insurer will make the employer pay more for plans over $21,000 because such plans will cost the insurer more. The employer, in turn, will either make the worker pay more or steer them toward cheaper plans.

So why go this route? It's unpopular to "tax" a benefit that workers get. It's popular to tax insurers, or at least it seems like it might be. What you lose in simplicity you make up in poll numbers. Baucus is doing the best he can with a bit of a bad hand on the funding side.

I'm going to take the rest of Labor Day off, but more on the Baucus plan tomorrow, by which point the details should be out. For now, it's worth noting that centrist Democrat Max Baucus is proposing spending $900 billion over 10 years to help low-income Americans afford health-care coverage and avoid medical bankruptcy. This bill is not going to be perfect, but it's going to be a big step forward.