The Foundry

Last night, Senate Majority Leader Harry Reid released his giant version of the Senate health care bill, H.R. 3590.

A first look at the bill – which is 2,074 pages long – shows yet another attempt to use taxes to punish uninsured Americans and punish companies that hire workers from low-income families, especially single parents. If you wanted to punish the poor and kill the job prospects of people who need jobs the most, this would be an effective way to do it.

The Individual Mandate. First, there is the “individual responsibility” provision in Section 1501 (pages 320-340). This would require anyone who fails to obtain a qualifying health plan – with a benefit package to be defined later by bureaucrats – to pay an annual tax penalty of $750 per adult family member and $375 per child, with a maximum penalty of $2,250 per family. These penalties will be phased in from 2014 to 2016 and then indexed for inflation, which means they are likely to increase nearly every year. These taxes are fixed amounts based on family size, not income.

The rich will not pay more, and the middle class will not pay less (although the poor may qualify for exemptions). This is even worse than the House bill, which imposed a tax equal to 2.5 percent of modified adjusted gross income above the minimum income necessary to file a tax return. A family of at least two adults and two children is actually worse off under the Senate bill if they make less than $99,350 a year, and worse off under the House bill if they make more. The only nod to affordability is a “hardship exemption” if the lowest available premium for a bare-bones plan is more than 8 percent of your income. But that saves you money only if your income is less than $28,125 a year.

There are, however, a few exemptions. You won’t have to pay the tax if you are a member of a qualified religion, as described in Section 1402(g)(1) of the Internal Revenue Code, or if you are a member of a “Health Sharing Ministry.” You also won’t have to pay the tax if you are an illegal alien (assuming you can prove your status) or if you are incarcerated, or if you reside outside the United States for most of the year.

The Employer Mandate. Then there is the “employer responsibility” provision (Section 1511-1513, pages 346-357). Companies with more than 50 employees are required to offer qualified health plans – with a benefit package to be defined later by bureaucrats – to their full-time employees or pay a tax of $750 per full-time employee. That’s a lot cheaper than providing health insurance, and the $750 is just a tax – it doesn’t count towards the employee’s premium.

However, an employer who does offer qualifying insurance isn’t entirely off the hook. Suppose an employer offers insurance, but has an employee from a low-income family who qualifies for a premium subsidy in the “health insurance exchange” and decides to accept it. In that case, the employer is stuck with a tax penalty of $3,000 for that employee, and every other employee who qualifies and makes that same choice – unless it’s more than a quarter of the employees, in which case the tax is capped at $750 times the total number of full-time employees. (Workers will be permitted to opt out of their employer’s plan only if they qualify for a subsidy, have insurance through another family member, or if the employer covers less than 60 percent of their premium.)

Hurting the Poor. In other words, if a company has a lot of low-income workers, they can save money by dropping their health plan and just paying the $750 per-employee tax. (And they can make as many employees as possible part-time.) However, if they have mostly middle-income workers, they face a heavy penalty — $3,000 – every time they hire a worker from a low-income family. This goes by the employee’s family income, not the income the employee is paid by any particular company. So a company could save $3,000 by hiring, say, someone with a working spouse or a teenager with working parents, rather than a single mother with three children.

Even worse, if at least a quarter of the employees qualify for a premium subsidy based on their income and family size, the company is going to end up paying the same $750 per-employee tax – whether they offer insurance or not! So companies with a lot of low-income employees will essentially be encouraged to drop their health plans entire, dumping the remaining higher-income employees into the federal exchange at their own expense.

Seriously Bad Policy. In other words, employers will have a strong tax incentive to lay off the workers who need the jobs most – people without other sources of income.

How will employers know who those workers are? The federal officials will tell them when they send the tax bill (Section 1412).

Employer will be required (Section 1513) to inform the IRS of precisely who their employees are and during which months they carried insurance, to make sure the IRS knows who has to pay the “individual responsibility” penalty.