Financing Single Payer: Let’s Stick to the Facts

Financing Single Payer: Let’s Stick to the Facts
Doug Hoffer, Independent Policy Analyst

Some have suggested that Dr. Hsiao’s plan to finance the new system will not work. But this is the wrong place to start. Dr. Hsiao submitted a proposal; it is not the state’s plan. Rather, it is a point of departure for further research and debate.

Dr. Hsiao recommended using a payroll tax to finance the new system. For a variety of reasons, including administrative convenience, the payroll tax should be part of the eventual funding scheme. However, using ONLY the payroll tax is both unfair and impractical.

For example, there are a number of Vermonters below retirement age that don’t work. Some of the non-working folks have substantial non-wage (“unearned”) income from capital gains, interest, and dividends. A universal health care system that does not require contributions from wealthy non-working Vermonters would be an insult to the rest of us.

And furthermore, if someone earns $100,000 in wages and an additional $100,000 from other sources, his or her effective rate would be half of that paid by everyone else. That is, assume the payroll tax is 8%. A person earning $40,000 would pay $3,200. The person earning $200,000 with only half from wages would pay $8,000, which is only 4% of total income. Does that seem fair to you?

In addition, limiting funding to payroll would exclude a substantial amount of taxable income. After subtracting wages for federal employees (who will not be part of the system), total Vermont payroll in 2010 was $11.1 billion. In contrast, total adjusted gross income in 2009 (latest year available) was $15 billion. Thus, even after subtracting federal wages, there would be well over $3 billion of income NOT taxed for the new system. This makes no sense.

Finally, the expected cost of the system is the predicate for conversations about financing. Unfortunately, the opposition has been trumpeting an “analysis” that assumes the system will cost much more than is expected (almost twice; see John Franco’s op-ed) and that it will be financed solely with a payroll tax. Not surprisingly, using these assumptions leads to substantial deficits and an unsustainable system. But the analysis is fatally flawed and is poisoning the discourse.

So let’s not get ahead of ourselves and let’s insist that all the parties stick to the facts.