11/21/2004

Salon.com News | More relief for struggling millionaires

If you thought the current Bush tax rate rewarded the wealthy, wait
until you get a load of his administration's latest plan.

Liberal policy wonks - and even some who aren't so liberal - did a
double take when they read the new tax plan floated by the Bush
administration in the Washington Post on Thursday. Was the White House
really suggesting eliminating incentives for employers to offer their
employees health insurance plans? Was it really proposing to shift the
country's tax burden even further onto states that didn't vote for Bush,
like New York and Massachusetts?

It was.

The Post reported that according to White House advisors, the Bush
administration "plans to push major amendments that would shield
interest, dividends and capital gains from taxation, expand tax breaks
for business investment and take other steps intended to simplify the
system and encourage economic growth."

The plan would further shift the tax burden off of people whose
money comes from interest and investments - the very rich - a prospect
that liberals find disheartening but not surprising. But what really
caught financial experts' attention was the next paragraph, which
explained how

Bush intended to pay for these tax cuts.

"The changes are meant to be revenue-neutral," the Post explained.
"To pay for them, the administration is considering eliminating the
deduction of state and local taxes on federal income tax returns and
scrapping the business tax deduction for employer-provided health
insurance, the advisers said."

"Revenue-neutral?" asks Martin Press, a high-profile tax attorney
and registered Republican. "There's no such thing. When lawmakers refer
to 'revenue neutral,' they mean it helps someone and hurts someone
else." If such policies move forward, says John Irons, associate
director for tax and budget policy at the Center for American Progress,
a liberal think tank, "You'll see an economy that benefits only the very
few at the very top. People in the middle will be squeezed, people in
the low end won't be helped at all."

The first part of the plan - which would get rid of federal tax
deductions for state and local income tax - would fall
disproportionately hard on Democratic-voting states, which already pay
more in taxes than they receive from the federal government. On his blog
MaxSpeak, the economist Max Sawicky calls the proposal "The Bush Blue
State Tax." Experts say the second part, which would do away with the
tax deduction granted to employers for providing health insurance, would
likely throw millions of people out of group plans, forcing them to buy
far more expensive individual insurance.

Irons was so amazed by the health insurance proposal he read it
twice. Right now, employers get a tax break for offering health
insurance plans to their employees. Take that away, and there would be
no reason for many companies to bother.

"If you're trying to imagine the quickest way to create millions of
uninsured people, that's it," Irons says. "Something like 52 percent of
everyone who has health insurance has it through their employer."
Without the tax benefit, he says, "I would expect a ton of companies to
drop health insurance altogether. And that would throw their employees
out on the mercy of the market."

Of course, people who get health insurance through their companies
have to pay for it, generally through payroll deductions, and
presumably, if companies no longer offered health benefits, employees
would see increases in their paychecks.

But that doesn't mean they could just go out and buy health
insurance on their own, as anyone who has ever tried to buy coverage
understands. Individual health insurance is far more expensive than
group plans, and individuals have less power to negotiate. "People would
be tossed out of these group plans and they'd have to fend for
themselves, and it would be prohibitive," says Sawicky, who works at the
Economic Policy Institute, a Washington think tank. "They'd have to take
[a policy] much more narrowly focused on catastrophic coverage and
they'd have to pay much more out of pocket."

Press says: "If you quit your job and your health insurance ends,
COBRA, a federal law, allows you to buy it [temporarily] from the
employer at the employer's rates. I have seen people spending $6,000 a
year on COBRA, and when they have to go out and get their own policy, it
goes from $6,000 to $25,000."

Press is a partner at the law firm Gunster Yoakley, whose clients
include Bank of America, J.P. Morgan Chase & Co. and Hilton Hotels Corp.
He's no bleeding-heart liberal. But, he says, "Taking away the deduction
for healthcare premiums? I don't see any logic for that under any theory."

Sawicky does. Health insurance companies, he says, "would make more
selling to individuals. Not that they're not making any money now,
they'd just like to make more."

If removing the health-insurance deduction would reward some of the
administration's supporters, removing state and local tax deductions
would punish its enemies.

Why? Because these state and local income taxes are highest in such
blue states as New York, Massachusetts and California, says Press.
Manhattan also has an income tax. State taxes are lowest in the red
states, which provide fewer services. Texas and Florida have no income
tax at all.

Right now, people who itemize their tax returns - about 30 percent
of taxpayers, according to Sawicky - can write off the money they pay in
local taxes, thus reducing their federal taxes. "If you're in New York
and you're a high-income person, you pay more state income tax, but the
blow is less severe because you can deduct it," says Sawicky. "So in
effect the price of your state income tax has been reduced. If you pay a
dollar in state income tax and you're in the 35 percent bracket, you can
deduct $.35, so in effect your state income tax is only costing you $.65
on the dollar."

"If you take away those deductions, you're in reality increasing the
taxes on high-taxing, generally blue states," says Press.

Because this proposal would increase the sting of state income
taxes, it would make it harder for states and cities to raise their
taxes and build up state programs like childcare and health insurance.
It would allow small-government conservatives to exert their influence
on blue-state social policy. "If you take away the deduction for state
income taxes, their logic is that you'll force government to be
smaller," says Press.

Sawicky, for one, doesn't actually expect these provisions to pass.
He sees them as "bogeymen" - bargaining chips that can be scrapped in
the fight to push forward the administration's real agenda: lowering
taxes on the wealthy. The new deductions, says Sawicky, could allow the
administration to say that it has a plan for paying for its tax cuts,
"but I don't think they're very serious."

Beyond these proposals, he says, "The more general problem is the
administration's policy, which is to blow holes in the tax system and
let the deficit go to hell." He expects this to lead to a financial
crisis that will force the government to slash social programs - what
right-wing operative Grover Norquist calls the "starve the beast" strategy.

So is the Bush administration truly pushing a system in which
someone who lives off interest and dividends - say, Paris Hilton - would
pay less tax than the person who cleans her bathroom? "Yes," Press says.

Irons explains it this way: "I was recently at the Treasury
Department, where they were talking about eliminating the estate tax.
The attitude was very much, 'Why doesn't everyone realize that we're the
ones who create the jobs? Why doesn't everyone realize that it's us, the
super-rich, that drive the economy?'"

He continues: "The attitude is that everyone who is working 40 hours
a week doing an average job at a construction site, or is a store clerk,
or me sitting in an office doing economic analysis, is feeding off the
people who are the real successes. The attitude is that the economy
should be geared to benefit the people who are business owners, who are
rich, who are giving us the benefit of jobs. That's what you really see
in the tax code.

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