California Health “Reform” Plan Would Break the Bank

Flash Report, January 28, 2008

California Governor Arnold Schwarzenegger, Assembly Speaker Fabian Nuñez, and their allies in Big Business and Big Labor are in desperate need of a reality check about the states’ finances.

A small group of these elites is pushing a massive healthcare spending package that would exacerbate California’s $14.5 billion budget shortfall while doing little to solve the state’s healthcare woes.

As envisioned, the plan would require a seven-percent increase in state spending on health care — about a $14.4 billion hike. He insists that the necessary funding can be had without raising taxes or imperiling the state’s financial future.

At best, such a promise is blind optimism. At worst, it’s an exercise in political doublespeak.

Take the governor’s proposed four-percent “fee” on hospital incomes. Schwarzenegger claims that this tax — or “fee,” in political parlance — will raise $2.3 billion and attract matching federal funds for a total intake of $4.6 billion.

But the Bush administration has promised that it will not provide money for expansions in state health care programs unless a concerted effort is first made to enroll residents who are already eligible for public aid but haven’t taken it.

The proposed bill does nothing of the sort. So it’s doubtful that the governor will receive those matching federal dollars he’s banking on.

The other two-thirds of the $14.4-billion price tag depend on equally uncertain sources, including a 6.5-percent tax — or “in-lieu fee,” as the governor calls it — on the payrolls of employers who don’t offer government-dictated health insurance to their workers. He estimates that this will raise $2.6 billion.

But Schwarzenegger seems not to realize that employers will simply pass those increased payroll taxes right along to their workers, mostly in the form of layoffs and wage cuts. Should this “in-lieu fee” become law, it would kill between 50,000 and 100,000 jobs in California every year.

Schwarzenegger’s bill also includes provisions to increase the cigarette tax by $1.75 a pack, but this assumes a decline in smoking of 1 percent annually, whereas the real trend is 3 percent, according to the non-partisan Legislative Analyst’s Office.

The Legislative Analyst’s Office conservatively estimates that the proposed bill will be $300 million over budget within five years. But that estimate accepts most of the bill’s proponents assumptions. More likely, when we quantify all the bad incentives in this proposal, it would cost $36 billion by 2010 — 2.5 times more than anticipated, if it actually achieved “universal” health coverage. Look at Massachusetts’ experience: A much smaller plan for “universal” health care budgeted at $125 million in 2006 is now running at $400 million.

Instead of irresponsibly increasing state spending, the state should provide individuals with incentives to purchase health insurance on the private market. A good first step would be to abolish the “Sick Tax” on individual contributions to Health Savings Accounts (HSAs).

An HSA works like a 401(k) — deposits and withdrawals are free from federal tax, but the proceeds can only be used for healthcare expenditures. The key is that patients — not government bureaucrats or insurance company employees — decide how the money is spent.

California is one of the only remaining states to tax HSA contributions. Because of this bogus policy, Californians with HSAs will have paid close to $100 million in excess “sick taxes” by the end of 2008.

Instead of hiking taxes, California legislators ought to harmonize the state tax code with the federal one.

A tax increase is not healthcare reform. Rather than taxing individuals and businesses into the poorhouse, California lawmakers should look to give healthcare power — and dollars — back to the people.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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