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Hitting the Political Sweet Spot on an Obamacare Alternative

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Ferrara asserts that it would not be any more politically treacherous to fully replace the job-based tax preference with a universal tax credit for everyone.  But there are plenty of reasons to think he is wrong about this.  For starters, Senator John McCain proposed the full conversion to tax credits in the 2008 presidential contest and was attacked relentlessly by the Obama-Biden campaign for unraveling employer-based insurance.  The attacks were effective and contributed significantly to Democratic momentum in September and October of that year.

The attacks were hard to deflect in 2008, and would be again in 2014 or 2016, because the full switch to universal tax credits would lessen employer control over their workplace insurance plans.  Many employers fear that, with a Ferrara-like universal credit, their younger, healthier workers will choose to buy low-cost plans on the individual market and leave employers with just the older and less healthy employees in their plans.  Under this scenario, premiums for employer plans would rise rapidly.  Anticipating this, many, if not most, large employers would oppose such an alternative, thereby diminishing the prospects for repeal.

Ferrara notes correctly that there is also political risk in putting an upper limit on the tax break for employer coverage, and he points in particular to the limitation proposed in the plan offered by Senators Richard Burr, Tom Coburn, and Orrin Hatch.  Their plan would allow tax-free employer-paid premiums up to only 65 percent of an expensive employer-sponsored plan. 

There are several things to note about the senators’ plan, and about the political viability of these kinds of reform plans in general.  First, the Burr-Coburn-Hatch “tax cap” was inadvertently set at too low of a level.  As explained in a separate post, the senators intended to set the cap at a level that would ensure their plan was budget-neutral.  It was only after they introduced their plan that it was discovered that the plan would produce large excess revenues.  There is room under the plan, therefore, to raise the cap substantially so that it affects only the most expensive employer-sponsored plans.

Second, the reform plan authored by the 2017 Project makes it clear that it is possible to construct an approach with a high tax cap and generous tax credits for those outside the employer system that is also fiscally sound.  The upper-limit thresholds in the 2017 Project plan are about $8,000 for individuals and $20,000 for families.  Only the most expensive plans would exceed these thresholds, and even in those plans, workers would still get generous subsidization of their health insurance, just not for the premiums above the tax preference limits.

It will also be much harder for supporters of Obamacare to attack this approach because of the Obamacare Cadillac tax.  Indeed, the more that the “tax cap” can be shown to be a better and more rational version of Obama’s Cadillac tax, the more difficult it will be for Democrats to attack it.

Obamacare’s unpopularity has created a historic political opportunity for the law’s opponents.  The public is thirsting for credible alternatives.  But that does not mean that advancing a replacement plan is entirely without political risk.  Conservatives must be careful about how they proceed, and that starts with avoiding the mistakes of 2008.  There’s no reason to create needless anxiety among those with employer coverage, because a viable plan can provide fairness, broad coverage, and lower costs without doing so.  The sooner conservatives come to this realization, the better.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.  Jeffrey H. Anderson is the executive director of the 2017 Project.

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