Health Plan May Call for 12% Payroll Tax on Firms

Many U.S. employers would face a payroll tax of 12% or more to finance health care reform under a plan now being considered by the White House, particularly if President Clinton adopts the most generous of three possible benefits packages that his advisers have designed, sources said Thursday.

Until now, Administration officials in private conversations have focused on 7% as the probable payroll levy on most employers and about 1.5% on workers, with special allowances to ease the burden on small businesses and low-wage earners.

But at least one working scenario under review within the White House would push the payroll tax well into double figures for many employers and 2% or higher for workers, according to sources with direct knowledge of Administration discussions.

“There is at least one benefits package for which 7% is not the right number,” said one informed source.

“It didn’t surprise me that one of those scenarios produced a startlingly high number,” another source said. “But I don’t know what that really means in that, politically, I can’t imagine they would go forward with that kind of scenario. The ranges they looked at were very wide.”

Some independent analysts have estimated conservatively that it would take a 12.5% payroll tax to pay for the kind of comprehensive health care reforms that the President and First Lady Hillary Rodham Clinton and their advisers have espoused.

No final decisions have been made by the President, and the ultimate rate of any payroll levy will depend on a series of intricately linked options that he now faces.

Most notable among them: how quickly to extend universal coverage to the 37 million Americans who are now uninsured and how generous the standard package of benefits provided to all participants will be. The faster the phase-in period and the more generous the benefits package, the higher the payroll levy will need to be.

White House officials have insisted on calling the levy a “wage-based premium,” arguing that it is not a tax because the revenues would not go into government coffers. Rather, the money would go directly into large, regional consumer alliances that would buy insurance for members.

Under current Administration thinking, a payroll tax on companies and workers would replace the estimated $255 billion they now spend each year on health insurance. Each percentage point in payroll deduction would raise $25 billion or more, according to economists and health policy experts.

But calculating precisely where to set the payroll deduction has hardly been a straightforward exercise for Administration analysts.

For one thing, the White House is trying to take into consideration the billions of dollars that employers would save that they now pay into workers’ compensation, the highly expensive health program for people injured on the job. The Administration intends to fold the medical components of workers’ compensation and auto insurance into the new national health care system it is designing.

Administration officials believe that businesses would not mind a significant payroll premium if they were freed from the dual burdens of providing health insurance to their workers and paying into workers’ compensation.

Among those most likely to benefit from a health care payroll levy are large manufacturing companies with aging work forces, such as the Big Three auto makers, who pay as much as 19% of their payrolls in health benefits for employees, retirees and their dependents.

With a payroll tax, such firms would see their health spending gradually decrease.

On the other hand, companies that do not now provide health insurance would see their cost of doing business rise.

To alleviate the payroll tax’s burden on small businesses and low-wage earners, the levy is likely to exempt the first $10,000 of a company’s payroll and the first $5,000 of a worker’s salary, sources said. Some small businesses also may pay a lower levy than larger firms.

For people at the higher income levels, Administration analysts will set a limit on how much of a worker’s total earnings should be subject to the levy, with the current range somewhere between $57,000 and $130,000.

White House analysts also are planning to apply the concept of the payroll tax to non-wage income, such as interest earned from investments, sources said. But they did not provide details.

Still another wrinkle in the payroll tax being discussed by Administration health planners would impose different tax rates in different states--as a way to account for differences among the states in job base, the number of uninsured and the cost of medical care, sources said.

This provision would allow state-by-state variations of 50% or more in the tax, they said. “The tax will vary dramatically,” said one source who has seen the proposal.

Moreover, analysts also are exploring ways to allow for different rates within a state. Equity is the rationale for setting different payroll tax rates, analysts said.

Without such differentiation, they said, a state like Connecticut, with a relatively high wage base and low uninsured rate, would end up subsidizing a state like Mississippi, with a lower wage base and a higher percentage of uninsured.

The goal is to allow a state like Connecticut to pay a slightly lower rate and a state like Mississippi to pay perhaps a slightly higher rate, according to one Administration actuarial consultant.

“The philosophy is that circumstances are different from state to state. Rather than have one national rate, have it be a state-by-state issue--make it an equity issue,” the analyst said.