The Bush administration’s new rules for Medicaid limit how much states can tax health care. Such taxes are bad public policy, and eliminating them would benefit society in fairness and efficiency. But the proposed limits are part of a lousy package that is drawing bipartisan opposition from governors and Congress. Moreover, states implemented such taxes in the first place because of the mindless anti-tax agenda typified by the Bush administration.
Medicaid is a federal-state program that pays for health services for 50 million people, including the disabled and children. More than half of the funds come from the federal government. States must come up with the rest.
Historically, states used general tax revenue. But as health costs rose and opposition to higher taxes became a dominant campaign theme, states implemented health care taxes. Minnesota instituted its MinnCare tax in 1993. More than 30 other states have similar ones.
These were passed under the delusion that they were taxes on health care providers, not on health care itself. Money was supposed to come out of the bulging coffers of hospitals, clinics and nursing homes — not consumers’ pockets.
That is as naive as assuming that oil companies bear the brunt of gas taxes because they, not drivers, send the actual checks to the government. Consumers understand that they bear the cost of gas taxes, sales taxes, alcohol taxes and telephone service taxes.
Taxes on health care providers are no different, except that they are more hidden, especially when an insurer or HMO pays for the services. Insured consumers ignore most charges beyond their co-pay or deductible. Prescriptions are taxed, but the tax is included in the price of the drug.
It is hard to think of a more unjust, regressive tax than the one on medical care. Governors and legislators know this, but argue that taxes on health care might be the least onerous option when political opposition to higher sales or income taxes seems overwhelming.
Health taxes are an excise tax, just like those on cigarettes and telephone service. Economists know such taxes have a high “excess burden.” The cost to the economy as a whole from excise taxes is high relative to the revenue they raise. They waste resources.
Thus, limiting such taxes should be good. But this latest proposal from the Bush administration is bad for several reasons. First, it is a federal intrusion on the historic right of states to run their own tax systems. It is coupled with cuts in federal funding, leaving states to bear a larger burden. And, it is being imposed as a federal administrative rule after Congress refused to pass the same measures in bills submitted by the administration over the past two years.
More broadly, it is an exercise in cynicism by an administration that has made cutting income taxes the centerpiece of its agenda while presiding over the fastest expansion of federal spending in 40 years. Finally, it shifts a problem to another level of government while falsely claiming it is helping taxpayers.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.