By Marjorie Power

March 14, 2011

Because of the recommendations in the Hsiao Report, funding proposals of the single payer health care system have focused exclusively on an employment tax to be paid by both the employer and employee. While it may be advantageous for some of the revenues to be levied in this way, to depend on a payroll tax as the only tax funding the system is not equitable.

Dependence solely on the payroll tax, is a blunt instrument that does not fairly distribute the costs of a universal health care system over the beneficiaries of that system. A flat tax rate is unfair to lower paid employees and potentially to families with more than one employed member. Working Medicare recipients may have to pay twice for both their Medicare premiums and the  payroll tax. The proposal does not deal with the cases of Vermonters who may be subject to double payments or those who will pay little or nothing.

Although a payroll tax is an improvement on the current regressive premium financing which is totally unrelated to ability to pay, a flat percentage payroll tax does not recognize the higher impact of these taxes on people with low incomes. In addition, most proposals put a cap on the total amount that an individual is required to pay. In effect, the tax is actually regressive since the average tax rate will be lower for the highest income earners—the higher the income over the cap, the lower the effective rate.

The strongest indictment of the payroll tax proposal is that it will create free-riders–trust-funders, coupon-clippers, wealthy retirees, etc–people who will benefit from the system and who can afford to contribute to its cost.

Although, there is no “official” financing proposal on the table yet, we have to make sure that when it comes, the funding system for our health care system is much more sophisticated and equitable than a straight payroll tax or it is never going to fly.