Rational Arguments

And I’m having trouble feeling bad about it:

The sun hasn’t exactly set on Solar Planet, but anxiety over the fate of the Arlington tanning salon has been running high ever since a “tan tax” took effect last Thursday.

One of the less-publicized measures in the new health-care law, the tax imposes a 10 percent surcharge on the use of ultraviolet indoor tanning beds.

Supporters — including the Obama administration, congressional Democrats and dermatologists — have argued that the tax will raise an estimated $2.7 billion toward the cost of expanding health coverage to the uninsured, while discouraging a practice that increases the risk of skin cancer by as much as threefold in frequent users, according to scientific research.

But outraged owners of tanning salons worry that the levy could deal a death blow to an industry already reeling from the recession.

Look, we tax cigarettes at a much higher rate than other things.  Alcohol, too.  And other stuff that’s unhealthy.  Tanning is really bad for you.  Plus, go out in the sun if you want to save money.

It’s not that I don’t understand why some of you are upset about this; it’s just that I can’t get that worked up about it.

Austin Frakt makes an excellent point about my post from last night:

[A] big reason employees want health insurance through their employer is the tax subsidy. The only way to make the employees [compensation package] whole is for the companies to pay in wages the equivalent of that subsidy plus the penalty plus compensating for loss of insurance coverage itself. That has to be more expensive than just paying for tax subsidized insurance. The only way it isn’t is if companies screw employees and fail to compensate for the loss of coverage. Nevertheless, employees don’t really get the insurance-wage connection. So, dropping coverage will feel like a loss no matter what, and that will piss off a lot of people. The way it will happen is gradually, as the excise tax starts to bite.

Because of the tax subsidy for employer based insurance, employers get to give a bigger benefit for less money than paying people the money they’d need to buy the insurance themselves.  If they cut insurance, they’d either need to pay employees a lot more (costly) or risk ticking them off (bad for business).

Not to mention that I can’t see unions taking this lying down.  At all.

This doesn’t mean that there will be hard choices, as Austin points out, as costs continue to rise and more and more plans hit the level of the excise tax.

UPDATE – Edited quote from Austin, because he’s a perfectionist.

First off, sorry for the absence.  I was on vacation with the family.  If you followed me on Twitter, you’d know that already.

A number of you have been writing me gleefully with the new talking point against the Affordable Care Act.  It’s going to kill businesses, cost them a fortune.  How much?

On top of AT&T’s $1 billion, the writedown wave so far includes Deere & Co., $150 million; Caterpillar, $100 million; AK Steel, $31 million; 3M, $90 million; and Valero Energy, up to $20 million. Verizon has also warned its employees about its new higher health-care costs, and there will be many more in the coming days and weeks.

Ironically, I haven’t been hearing this nearly as much from conservative politicians as I am from the WSJ.  IT may be because this argument isn’t nearly as powerful as it looks at first glance.

Sure, those are big numbers.  But they seem way to big to be an instant tax.  Why did no one complain before?  Here’s a likely answer:

When the Medicare Part D prescription drug bill passed in 2003, businesses were given a double subsidy to help cover the cost of providing prescription drug coverage to their retirees. The government picked up 28% of the cost of their retiree prescription drug plans, and businesses were allowed to both exclude that 28% subsidy from their income and at the same time deduct that subsidy from their income for tax purposes.

In 2013, that changes. Under the new law, businesses will still get the same 28% subsidy, and it will still be tax free. They just don’t get to deduct the subsidy.

Seems reasonable, right? This is how virtually every other federal subsidy for businesses and individuals is treated by the IRS. Indeed, Donald Marron, acting CBO director for President George W. Bush, put it this way: “[A]s the Joint Committee on Taxation recently noted, that treatment is highly unusual. In my view, it’s right that the recent health legislation closed that loophole.”

This change has garnered recent headlines because, to comply with accounting laws, companies affected by the provision have taken a one-time charge reflecting the loss of future tax deductions over the decades-long duration of their retiree health-care plans. Critics have seized on this accounting adjustment to suggest these costs—as much as $1 billion in one company’s case—are going to place immediate and substantial cost burdens on America’s businesses.

This is disingenuous.

The actual cash flow impact of these provisions begins in 2013, and is only a tiny fraction of the accounting charge-offs.

This newspaper reported last Friday that while one company calculated a $100 million hit to its first-quarter earnings, its actual cost after taxes and subsidies, beginning in 2013, was closer to $7 million a year, or less than 1% of its profits last year.

Credit Suisse’s response to the tax controversy was: “don’t overreact to the hit on earnings.” Morgan Stanley referred to it as “noise” that would have “no impact whatsoever” on their view of this earnings cycle. And UBS projected that the impact in virtually all cases represented less than 1% of market capitalization for affected companies.

First, this is an elimination of a case of double-dipping.  For-profit corporations were getting to deduct an expense they weren’t paying for.  So…  that’s not really fair.  Not only that, they were showing this as a future way to profit.  When the Act closed the double-dipping, they had to adjust their future earnings downward.  They didn’t have to write  a check or pay a tax.  They just had to show that they could not show this as a way to make extra money on your dime.  Your taxes paid for that double-dipping.  I’m not happy about that.  Why are you?

Then, they went and made it look worse.  They took the changes over decades and added them all into one large number.  So the “$100 million” hit is really closer to “$7 million a year”.  And, it doesn’t even start until 2013.

Yes, businesses are taking a small hit.  They are losing a loophole that let them double-dip and make extra money with taxpayers’ money.  No longer.  And, they are getting lots of new benefits as well.

There is likely a reason that Republicans aren’t making a huge deal out of this one.

A reader writes:

I do like my cadillac insurance plan. It costs me just $150 a month but my employer plays the other $750. Under the 2 plans, I would be charged a tax of 35% for having that plan…

I also have read the 35% tax that we will pay for our insurance premiums if the total cost of the plan exceeds $750 (that’s my amount plus the amount my employer pays for me) for a single plan. Most of us with anything close to a decent policy now will be paying this additional luxury — oh yeah, “cadillac plan” — tax.

I am completely open to debate as to how we raise money for reform.  And I acknowledge that increasing access will raise costs.  Some people feel this should be done in a progressive way, that focuses on the more well-to-do.  The tax on “cadillac” plans is one way to do that, although not my preferred method.  Others feel they should be flat, and affect everyone the same percentage.  Debate.

However, this reader is wrong on a few things.  If I read his numbers correctly, then the total premiums on his plan are $900 a month.  If he is part of a family, then this isn’t a “cadillac” plan.  Remember, the average family plan in the United States is over $13,000 a year.  That’s the average!  A Cadillac plan would have to be much, much more expensive.

If, however, his is a plan for a single person, then his plan is very expensive at $10,800 a year.  It’s almost as much as my very generous family plan!  However, the “cadillac” tax is only on that money above the cap.  And the specifics of the Baucus bill say:

Under the Baucus plan, insurers selling a plan costing more than $8,000 for an individual and $21,000 for a family would have to pay a 35 percent excise tax on the excess amount.

So this reader would owe a total of $980 of “cadillac” tax right now.  I’m not saying that’s not money, but it’s not communism either.

UPDATE: Fixed my math!