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Angie Drobnic Holan
By Angie Drobnic Holan October 21, 2009

Sarah Palin says health care reform will raise taxes on the middle class

Sarah Palin likes communicating directly with her fans via Facebook, where she's posted several notes about health care reform. In her latest note, titled "Good Intentions Aren't Enough with Health Care Reform," Palin criticized a proposal from the Senate Finance Committee as misguided and too expensive.

Her note includes several criticisms of the Democratic proposal. We wanted to look specifically at what she had to say about excise taxes on high-dollar health plans. 

"Supposedly the Senate Finance bill will be paid for by cutting Medicare by nearly half a trillion dollars and by taxing the so-called 'Cadillac' health care plans enjoyed by many union members," Palin wrote.

Those taxes and others will ultimately be passed on to consumers, she said.

"The Senate Finance bill is effectively a middle class tax increase, and as (economist Douglas) Holtz-Eakin points out, according to the Joint Committee on Taxation those making less than $200,000 will be hit hardest," she said. Palin was referring to an op-ed Holtz-Eakin wrote for the Wall Street Journal ; you may remember he was the chief economic adviser to John McCain during the presidential campaign.

We wanted to know if she was right that the taxes on 'Cadillac' plans would hit people who make less than $200,000 the hardest.

The excise tax works in a roundabout way. Under the Senate Finance proposal from Sen. Max Baucus, insurance companies would have to pay a 40 percent excise tax on health insurance policies that exceed $8,000 for individuals and $21,000 for families; they would pay taxes on the amount that exceeds those thresholds. We spoke with three economists on both the left and the right, and they all agreed that insurance companies will not simply absorb the new tax; they will pass it along in the form of even higher premiums. Employers will then try to avoid the new higher costs by buying cheaper health plans.

Finally, the economists agreed that if employers have to scale back on health plans, they will eventually pay higher wages as they seek to retain workers. At this point, disgruntled workers may say "Yeah, right," but the economists were adamant that it is the case. There are data that we won't get into now that back up their point.

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Here's where the analysis that Palin mentioned by the Joint Committee, which is nonpartisan and advises Congress on tax policy, comes in: At the Senate's request, it tried to figure out the effect of the excise tax on federal taxes collected. Like the economists we talked to, the Joint Committee also believes that wages will rise if employers select lower-priced health insurance, and the government gets to tax those higher wages. So the Joint Committee created a series of tables projecting how much additional income tax would be collected over the next 10 years. By 2019, about 87 percent of those people paying higher taxes would make less than $200,000, according to an analysis of the preliminary Senate Finance proposal.

So here's what that means: If workers end up getting paid more, they'll also be taxed more.

We have to point out that this analysis counts tax filers who would see any tax increase due to the excise tax proposal, and it doesn't give details on how much they would pay on average. And the excise tax only has the effect of increasing taxes for those who have high-dollar plans, roughly 25 percent or less of all tax filers in 2019. These are plans that generally have very low co-pays and lots of extras. A Boston Globe report described one plan as offering free surgery, free rehab for alcoholism, and reimbursements for yoga classes. CEOs have these types of plans, but so do some unionized workers. One of the economists we spoke with said they are usually offered by state and local governments and universities, the types of jobs known for great benefits. The plan the Boston Globe described was for state workers in New Hampshire.

Still, the economists we talked to agreed that the excise tax would affect many people who make less than $200,000. And other parts of the bill wouldn't offset that.

• "You would expect that over time the number of people who are exposed to this would grow," said Stephen Zuckerman, a health economist at the left-leaning Urban Institute. He still thinks it's a good idea. "If you really want to do health care reform, and expand Medicaid and provide subsidies for low-income people, you have to provide some way to pay for it. Putting a limit on the amount of insurance that can be tax-free is not unreasonable."

 • "The tax is not simply going to affect millionaires, it's going to affect some people who are middle income," said Paul Van de Water of the left-leaning Center for Budget and Policy Priorities. Van de Water has nevertheless written a lengthy defense of the excise tax .

• "Clearly a number of these provisions, this one included, will increase taxes on people below the $200,000 income level," said Ed Haislmaier, a senior research fellow with the conservative Heritage Foundation. "The idea that this is just for senior managers is actually quite wrong."

Back to Palin: She said that according to the Joint Committee's report "those making less than $200,000 will be hit hardest" by the excise tax. We want to emphasize that the tax will affect only a minority of taxpayers. But Palin is right that of the taxpayers it does affect, a majority make less than $200,000, according to the Joint Committee analysis. It turns out a lot of regular Joes and Janes have those 'Cadillac' plans. We rate her statement Mostly True.

Our Sources

Sarah Palin, Good intentions aren't enough when it comes to health care reform , Oct. 17, 2009

Douglas Holz-Eakin, The Baucus bill is a tax bill , Oct. 13, 2009

Joint Committee on Taxation, Distributional effects of the excise tax in the Baucus bill, obtained by PolitiFact

Center on Budget and Policy Priorities, Excise Tax on Very High-Cost Health Plans Is a Sound Element of Health Reform , Oct. 20, 2009

Interview with Stephen Zuckerman of the Urban Institute

Interview with Paul Van de Water of the Center on Budget and Policy Priorities

Interview with Ed Haislmaier of the Heritage Foundation

Boston Globe, Healthcare overhaul could limit tax breaks on benefits , July 4, 2009

Ezra Klein, HCAN vs. the Excise Tax , Oct. 16, 2009

Health Care for America Now! Blog, No Ezra, the Excise Tax is not a "Good" Thing , Oct. 16, 2009

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Sarah Palin says health care reform will raise taxes on the middle class

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