Friday, January 15, 2010

Equal protection from taxation?

Please read the plain language of this story by Montgomery and Shear at the Washington Post:

[T]he White House on Thursday broke the last major logjam blocking enactment of far-reaching health-care legislation, cutting a deal with organized labor on how to tax high-cost insurance policies.

The agreement, forged in a marathon negotiating session that included White House officials and seven prominent labor leaders, would exempt union members from a proposed surtax on expensive insurance plans until 2018, five years after the legislation would take effect.

This is extraordinary. If passed, the bill would establish different rates of taxation for citizens depending on whether they are members of a union. I know that we have established classes of citizens based on income. But I do not know of any example in which tax rates are based on membership in a bargaining collective.

So, to my attorney readers out there, would this pass Constitutional muster if it were brought before the Supreme Court?

25 comments:

Anonymous said...

I am neither an attorney nor any kind of Constitutional scholar, so all I can say is I hope it doesn't. I am NOT a union member and I get taxed more because of that! Horrible, just horrible.

According to FOX legal guy Andrew Napolitano (if I recall correctly)none of this may be constitutional because this allows the gov't to force you into buying a product. He says there is no provision in the Constituion allowing them to do that.

Bill

Anonymous said...

For of-the-moment updates on what is or is not in the excise tax deal, see here: http://news.firedoglake.com/2010/01/14/union-deal-on-excise-tax-higher-thresholds-transition-period-open-exchanges/

Details are still developing, but it appears that the union leaders didn't bargain a way for union members to avoid the tax; they simply created a mechanism for those whose healthcare benefits are the result of collective bargaining to have time to renegotiate. Nothing I've seen indicates that Cadillac plans will be taxed differently on the basis of how they were created (i.e., union or non-union).

Paul Levy said...

So, doing indirectly what you cannot do directly?

After all, if it provided no value to the unions, why was it a deal-breaker?

Five years is a long time to renegotiate. That's millions of dollars in benefits that still accrue only to those who have collective bargaining agreements.

Anonymous said...

On the political side, if the provision stays in, and if it applies only to union members, it would be a huge negative for the Ruling Party in the mid-term elections. With 10% or less private sector union members in most congressional districts, I can’t imagine the White House holding all its votes from the early rounds. We’ll have to hear what the congressional reaction is, but an early prediction might be, “no additional votes for the final bill, and little or no room to lose any votes for final approval”. If there are any added votes, I’d have to believe there would be votes lost, too.

Anonymous said...

Anon-from-2:55 here:

Sure, it's still taxing different individuals differently, but that's long been upheld in the courts. A big part of the deal, though, seems to be that it treats other high-cost plans (the "teacher tax") for those employers whose workforces are disproportionately older or less healthy, in a much fairer way by raising the threshold for those groups, as well.

It looks like all the provisions are aimed at making sure the excise tax falls on actual Cadillac plans as originally envisioned. I.e., the kinds of non-taxed income commonly provided to (ahem) executives.

Paul Levy said...

Hmm, executives here get exactly the same health plan as the other workers.

But, if your logic is right, why should it only be offered to union plans covering similar job classes and insurance premium as non-union plans?

And have the courts upheld different taxation rates based on criteria like union membership?

finnigan said...

I know that we have established classes of citizens based on income. But I do not know of any example in which tax rates are based on membership in a bargaining collective.

Income tax rates are also based on these things :
1. Marriage status
2. Number of dependents
3. Blindness
4. Home ownership
5. Receipt of employee-stock-options as part of income
6. Any other condition that creates a credit or deduction - some call an incentive, and some call a loophole.

So, are taxation differences bases on membership in a bargaining collective so Constitutionally different from taxation differences based on executive status with perks such as generous stock options?

Anonymous said...

Don't misunderstand, I wasn't impugning your hospital at all. I just thought it warranted a nod to "executives" as a class.

And it's not really "my logic," but I do think it's logical. The original idea behind the Cadillac tax was that it would fall on those healthplans that are really extra income in the form of untaxed benefits. I personally agree with the House, which wants to tax individuals earning over $500k/year and call it a day. Some justifiable concern about small business owners aside, I think it's fair. But the decision having been made to go with the Senate's version (Cadillac tax) there needs to be a way to ensure that it actually falls on Cadillac plans, vs. plans that are high-cost due to the nature of the employees they cover.

I'd be getting way ahead of myself if I tried to answer whether taxation rates dependent on union membership would pass muster, but I still don't think it's a live issue, because state and local employees would also be exempt until 2018. It's taxing the types of healthplans differently, not the individuals.

Paul Levy said...

finnigan,

I don't understand your last sentence, which seems to contradict the point of the list you gave above.

anon 2:35,

I don't get this: "It's taxing the types of health plans differently, not the individuals." Would the new exemption provision apply identically to the same health plan offered to a union person versus a nonunion person?

finnigan said...

Paul - what I'm saying is, how is "taxation protection" due to union membership any different, Constitutionally, from "taxation protection" due to marriage, or earning generous stock options?

Paul Levy said...

But, for example, "taxation differences based on executive status with perks such as generous stock options" are not actually based on executive status. In the tax law, they are based on the form of the income, not what kind of person earns it. If workers get stock options, they are subject to the same tax rules.

Anonymous said...

"It's taxing the types of health plans differently, not the individuals."

Meaning: it's not a personal tax, it's a tax on different kinds of employee health benefits. The whole point is that employers don't offer "the same health plan...to a union person versus a nonunion person," as you put it.

I think your point is that this is somewhat a semantic argument: Is it "a health plan offered to individuals who are union members" or is it "a health plan either a) collectively bargained, or b) designed for employees who are disproportionately older/sicker, or c) state and local health plans"? In which case, yeah, potayto/potahto. Except that going to finnigan's point, we tax individuals differently based on "membership," voluntary or not, in all sorts of different "categories." (E.g., homeowners, married couples, parents, physically handicapped, etc.) So that would mean the answer to your original question is "Yes, it's probably Constitutional."

But I'm not sure I understand why you asked in the first place. Why do you think it's so extraordinary? And why do you imply that it's unfair?

Paul Levy said...

It is so self-evident. If a union worker has an identical health insurance policy as a non-union worker, why should the tax treatment by the federal government be any different? This is not semantics.

Paul Levy said...

To expand, I know lots of companies that use the same benefit design and employee contribution for the non-union workers as they negotiate with their union workers. So, under this legislative proposal, some of those employees would get a tax exemption and some would not.

Anonymous said...

(2:35) Okay, so your point goes to fairness, then?

The unions' argument (which I think is a decent one) is that they have for years accepted a trade-off: no salary increases in exchange for generous health benefits. It was in employers' best interests to do it that way thanks to the crazy let's-not-tax-benefits-as-income idea we never dropped after WWII. Now that the game is being re-written, they're at a huge disadvantage because those health plans include provisions for retired union workers, meaning disproportionately older folks. They cost a lot more than health plans with a better risk pool, but don't have a ton of special perks.

"Cadillac plans," or a high-cost plan offered to a non-union employee, would be much more likely to be either a) high-cost because that employers' employees are disproportionately older or sicker, or b) part of a gold-plated executive compensation package, as non-taxed income. If it's the former, they get the same deal as the unions. If it's the latter, there was never a salary/healthcare trade-off, and they don't get the deal.

On the face of it, I think it's reasonable. I'm not a homeowner, so I don't get any kind of tax credit for what I pay for housing, and I'm not crazy about that personally. But I understand why it's a decent social policy. Same thing here.

Paul Levy said...

Maybe we are getting closer, but I'm not sure. I don't see that this -- "If it's the former, they (ie.., nonunion workers) get the same deal as the unions." -- is in the bill.

Anonymous said...

That's part of the difficulty here: as far as I know, the actual terms of the deal aren't 100% clear. But the link I posted is the most detailed I've seen today, and so I'm looking at these provisions:

"4) For all Americans, the threshold rises for employer-based plans that are pricier because of age or gender." That goes to plans that are high cost because of the nature of the workforce (the "teacher tax").

To your other question, about employers that use the same plans and rates for non-union workers that they negotiate with the unions, then wouldn't that fit in provision #5 at FDL? "5) State and local employee plans, as well as plans that are collectively bargained, get until January 1, 2018, before their plans would be hit with the excise tax." I would think that such an employer would pretty clearly be offering "plans that are collectively bargained." But it's arguable, certainly.

That said, yes: if you're correct then non-union employee plans would get skimmed over the $24k threshold, whereas union employee plans would not. I guess in that instance it wouldn't be good for those employers and their workers. How big a deal is that, though? Isn't that kind of like it's not great for me that my neighbor gets a tax break on her house, and I don't because I'm paying someone else's mortgage in rent? Or are a lot of employers likely to fall into this category of same-plan, different-workers?

Anonymous said...

And thanks, by the way, this has been a great conversation! -2:35

Anonymous said...

Interesting discussion. If you look at SEIU 1199 workers' benefit plan, they, by far, have a Rolls Royce plan....no copays for drugs or office visits....my non union Cadillac plan has copays for both. What's wrong with this picture?

Paul Levy said...

Transferred from Facebook:

Jon: Amazing how discriminatory this is against small businesses & their employees! Yes, I believe a legal challenge is in order.

Omid: Amen, I feel like such a sucker. Every one got some thing out of this 'healthcare reform'. All I got was higher taxes, and potentially devastating taxes for my industry (medical devices).

Judy: All employers have to do is let their employees form a union. Easy!!

Stephen: I seem to recall a campaign promise that no one making less than $250,000/year would have their taxes increased, not even one penney. He was so emphatic. I knew it was a crock of BS, and now with this new sell out on health care, whether you call it a tax or any other name, it still smells and many many people making far less than $250,000 will be taxed and in the process will have to make up for the shortfall caused by eliminating union health plans from the tax. By the way, Crap and trade will also increase costs to the taxpayer making less than $250,000. Whenever you charge a company a tax, they have no choice but to pass it along to the consumer. If my costs for product go up because of this policy, I consider that also a tax. That's two broken promises. I am still watching CSPAN waiting for the hearings to appear. At least 8 times he promised the public. Enough is enough!

Jane: This is exactly why the MA Senate race is a dead heat. Fortunately, the American people are basically fair. Judy: how do self-employed farmers (or any other) go about forming a union?

Judy: Jane check this out-- the Nebraska Farmers Union-- owned the state years agohttp://www.nebraskafarmersunion.org/

Anonymous said...

Paul, I am taxed differently than my straight colleagues for my family health insurance plan because my partner isn't recognized as a qualified dependent for federal tax purposes.(This occurs even though the plan also covers my daugher and the cost of the policy--in total and for my employer--is exactly the same as it would be if my partner/wife were not covered under the policy at all.

Same plan, different taxes.

Nancy Turnbull

Paul Levy said...

To anon and others:

Just to finish/continue where I started, about the unfairness of this legislation, check out today's NYTimes editorial in SUPPORT of this deal, at http://www.nytimes.com/2010/01/16/opinion/16sat1.html:

"The agreement treats unionized workers far more favorably than nonunion workers, the price for the support of important Democratic constituencies."

And later in the same editorial: "The much larger number of nonunion workers would get no comparable protection."

And to Nancy, of course that makes no sense, but why does adding another inequity make the world any better?

Anonymous said...

Nancy's point goes to the question of constitutionality. Taxes like remuneration for work, need not be fair, unfortunately. Anon.

Anonymous said...

I wasn't suggesting that I supported the proposed two-tier tax structure, Paul, just that one can find examples of different groups of people being taxed differently, even for health insurance. In fact, I am opposed taxing "Cadillac" plans at all because I don't think it will achieve what the economists contend, it's extremely unfair, and it's just cost-shifting. The cost of health insurance varies for many reasons in addition to benefit design, including the health of health care costs where you live, the characteristics of who else is in your insurance risk pool, and how much purchasing clout your group has or has not. There is an interesting article on this usse in the latest Health Affairs by Jon Gabel and colleagues: Taxing Cadillac Health Plans May Produce Chevy Results. I can't find a link that doesn't require a subscription but maybe someone else can. Nancy T.

Paul Levy said...

Thanks, Nancy. Months ago, I predicted that this kind of deal would be made: http://runningahospital.blogspot.com/2009/10/back-to-insurance-tax-issue.html.

My personal approach would have been to get rid of the tax deductibility of all insurance plans. This would have raised $250 billion per year to pay for expanded insurance access and would have had the advantage of using the inherent progressivity of the income tax system to pass along the costs in a way related to income -- as opposed ot his artifical distinction between union and non-union plans.