Health insurance tax = higher wages?

If expensive health plans are taxed, economists assume the tax would be passed on to workers. But they also assume the tax would raise wages. Here's the logic.

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By Jeanne Sahadi, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- When was the last time your employer gave you a raise because the company had a little windfall? Don't feel bad if your memory is drawing blanks.

But economists are optimistic that such a thing could happen. In fact, many assume that wages actually might rise over time if lawmakers end up taxing the most expensive health plans offered by employers.

The tax is the leading proposal in the Senate to pay for the expansion of health insurance coverage to the roughly 46 million Americans who are uninsured. It would apply to high-cost health plans offered by employers, which typically include health, vision and dental insurance, among other health-related benefits.

The parameters of the tax may change as negotiations evolve. But the latest version would impose a 40% excise tax on plans costing more than $8,000 for individual coverage and $21,000 for family coverage. The tax would only apply to the cost of plans above the threshold amounts.

Higher thresholds would apply to plans for retirees over age 55 and high-risk professions. And they would be temporarily higher in 17 states where the cost of living is expensive.

The proposal would raise an estimated $201 billion over 10 years, according to the Joint Committee on Taxation (JCT).

But it could raise a lot more beyond 10 years, since the thresholds would rise on a formula based on inflation, and health care costs increase far faster than inflation. Translation: As health care costs rise, more and more plans will exceed the threshold.

What does that have to do with my pay?

The hope, however, is that the revenue will be generated not from a lot of health plans being taxed, but because workers are getting paid more.

Here's how that could work: the specter of the tax would cause employers with plans approaching or exceeding the threshold to opt for lower-cost plans.

If that happens, the employer would end up spending less to subsidize employees' health care and have more money to pay workers.

"If employers increase or decrease the amount of compensation they provide in the form of health insurance ... CBO and JCT assume that offsetting changes will occur in wages and other forms of compensation ... to hold total compensation roughly the same," Congressional Budget Office (CBO) director Douglas Elmendorf wrote in a letter to Senate Finance Committee Chairman Max Baucus, D-Mont.

And just as with any raise, that money would be subject to income and payroll taxes.

Sound implausible? Well, there doesn't seem to be much precedent. When CNNMoney.com asked a handful of economists and tax experts to point to just one example in the past when employers passed on a windfall in savings to their workers, no one could recall a specific instance of that happening.

But they offered a few explanations that suggest it may not be so far-fetched.

The first is that unions specifically agreed to lower wages in exchange for better benefits. Presumably, if the tax works as hoped, unions will then bargain for higher wages since the value of their health benefits will have declined.

The second is that while no employer feels pressure to pay more to workers today, given how high unemployment is, at some point the labor market will tighten and employers will again have to offer competitive compensation packages to attract the best talent.

Lastly, it's not impossible to believe that companies gave workers smaller raises than they might have otherwise because health costs have risen four times as fast as wages over the past decade.

Granted, that doesn't explain why the lowest wage workers haven't done better. "For those at the bottom [of the income distribution], who saw even more wage stagnation than those at the top, health cost inflation can't explain the squeeze on wages because they have health insurance coverage at much lower rates," said Elise Gould, director of health policy research of the liberal Economic Policy Institute.

Nevertheless, that doesn't mean it might not have been a factor for those higher up the income scale.

How much of a raise and when?

If wages do rise as a result of employers' saving money on health costs, it won't happen overnight.

And "no one's arguing it will be a dollar-for-dollar offset," said Paul Van de Water, senior fellow at the liberal Center for Budget and Policy Priorities.

"Some of it will go to shareholders," said Howard Gleckman, editor of the blog Tax Vox and senior research associate at the nonpartisan Urban Institute. But, he added, "I think some of it will end up in wages."

And if it does, the revenue collected from income and payroll taxes will go up. In fact, it's assumed that increased income and payroll tax revenue will pay for much of the expansion of health insurance coverage.

How much? The JCT estimates more than 80% could come from taxes on those increased wages, Van de Water said.

If the economists are wrong and wages don't rise, that could be a sign that health costs aren't falling as much as hoped. In that case, he noted, the revenue to subsidize insurance purchases would instead come from the tax being imposed on a growing number of high-cost health plans.

So, workers would end up with higher health costs and no wage increase. Those are two reasons to hope the economists' theory is right. To top of page

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