Normally, when some taxpayers change their behavior and avoid a tax, the tax raises less revenue than might otherwise be expected. Oddly, the insurance tax is designed in a way that prevents any revenue decline. The ACA presets the insurance tax’s total revenue yield at $8 billion next year, rising to $14.3 billion by 2018. To make this possible, each year’s tax is calculated in the following year, with the preset total tax burden allocated among insurance companies based on each company’s share of the market.
If insurance companies raise premiums to cover the tax and some employers respond by self-insuring, the result will be a bigger tax on the employers that remain in the insurance market. Of course, the bigger tax would fuel another round of premium hikes, causing more employers to self-insure, further premium increases, and so on.
According to the Kaiser Family Foundation’s 2012 Survey of Employer Health Benefits, 15 percent of the smallest employers self-insure, roughly half of employers with 200–999 workers self-insure, and 93 percent of firms with more than 5,000 workers do so. Because the smallest employers almost never self-insure, they will end up bearing the brunt of the tax. Midsized firms will be most likely to shift to self-insuring their workers.
Congress and the public may not view insurance companies as sympathetic figures. But it’s the insurance companies’ customers who will be most penalized by this new tax, whether through $400 premium increases or by being forced to run the risks of self-insuring.
Democrats’ reluctance to unwind any of President Obama’s signature health care bill makes repeal of the insurance tax an uphill battle. But efforts are already underway by key Republicans. Senator Rob PortmanRob PortmanGOP vulnerables dial back Hillary attacks Vulnerable House freshmen passed most bills in decades, analysis finds Republican opposition to raising the minimum wage Is crumbling MORE, newly appointed to the Finance Committee, recently introduced S. 24, the Small Business Health Relief Act, which would repeal the insurance tax and other new taxes from the ACA. House Ways and Means Committee Member Charles BoustanyCharles BoustanyDavid Duke gets debate slot in La. Senate race The Trail 2016: Trump’s new enemy Prostitution fight tightens Louisiana Senate race MORE’s insurance tax repeal bill garnered 226 cosponsors last Congress.
Much like the medical device tax and the pharmaceutical tax, this tax is an ill-designed policy that will distort the industry and raise costs for consumers. Regardless of what happens to health care reform more broadly, the insurance tax should go. Democrats, given their constant concern about the progressivity of the tax code, should join in the fight to repeal a tax that boosts costs for small businesses and their workers. And all lawmakers, regardless of party, should be concerned about how this bill will cause distortions across the marketplace.
Brill is a research fellow at the American Enterprise Institute. He previously served as chief economist and policy director at the House Ways and Means Committee.