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Friday, June 20, 2008

Health Care Spending versus Extending 2001/2003 Tax Cuts - Tough Issues

On June 16, the Senate Finance Committee sponsored a Health Reform Summit. The presentations focused on costs and possible improvements to the delivery and insurance system.
CBO Director Peter Orszag's first part of his testimony helps put the immense financial problems facing us in the next few years in perspective. He says:

"The single most important factor influencing the federal government’s long-term
fiscal balance is the rate of growth in health care costs. The Congressional
Budget Office (CBO) projects that, without any changes in federal law, total
spending on health care will rise from 16 percent of the gross domestic product
(GDP) in 2007 to 25 percent in 2025 and 49 percent in 2082, and net federal
spending on Medicare and Medicaid will rise from 4 percent of GDP to almost 20
percent over the same period.1 Many of the other factors that will play a key
role in determining future fiscal conditions— including the actuarial deficit in
Social Security and a decision about extending the 2001 and 2003 tax legislation
past its scheduled expiration in 2010—pale by comparison over the long term with
the impact and challenges of containing growth in the cost of federal health
insurance programs."

And he didn't mention the cost of AMT reform. As noted in my last blog entry - the dollars involved in both tax and health care reform are so immense that the discussions need to be better merged in some way. Otherwise, it might be a race to see which issue gets solved first - finding a way to extend all or part of the 2001-2003 tax cuts or finding ways to address health care spending. Also, there are a lot of health care dollars in the tax law that could be used for either tax reform or health care reform. It seems that the Senate Finance Committee may be going in that direction given that they have held information hearings on both topics to help get ready for work needed in the 111th Congress.

Another link between tax and health care reform is that the increaing cost is hurting the ability of US employers to compete due to the decades old (and odd) linkage of health insurance and employment. One reason cited for business tax reform is to help companies to be more competitive in the global market place. But it isn't just a high tax rate that is a problem, it is health care spending (and for some companies today with an effective tax rate well below 35%, exploding health care costs might be a bigger concern). Craig Barrett, Chairman of Intel, also testified at the Health Reform Summit. He stated:

"Without providing some major fixes, US business will continue to export jobs
directly as a result of healthcare costs. I conclude that healthcare is pricing
itself out of business, and in the process is just going to drive CEOs to make
decisions to put resources elsewhere where the healthcare cost is much more

That will certainly make our problems even worse if we lose jobs.

Mr. Barrett also expressed concern that the health care debate wasn't focused sufficiently on how to control escalating costs, but instead tended to look at who should pay. He said:

"Sadly, the current debate typically centers on “who pays”? This leads to
endless discussion on which financing mechanism to utilize to increase the funds
deemed necessary to change our healthcare system. While entertaining, it does
not address the inherent problem in the current model; namely the excessive

These two reform efforts are extremely challenging due to their magnitude, but also very crucial. Even if the 2001-2003 tax cuts expire, there is still the AMT problem to fix which is also costly. How to approach solving these difficult issues are good questions to ask of candidates for Congress and President this year. I proposed a few questions on these budget matters a few months ago.
  1. What would you want to ask the candidates?
  2. What do you think can be done to address the enormous fiscal challenges that lie ahead?

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