Unions Mislead on Health Care

Summary

Two labor unions are running ads falsely characterizing McCain’s health care plan.

• A United Auto Workers spot features a woman who claims she’d pay up to $2,800 more in taxes. That’s a bogus figure, based on a false assumption about what McCain is actually proposing. She and families like hers would actually come out money ahead.
• A Service Employees International Union ad claims McCain’s plan would "deny coverage for preexisting conditions like cancer." That’s not true. Although McCain’s plan would not require coverage, it doesn’t deny it. Some experts have said one aspect of McCain’s plan could lead insurance companies to avoid state regulations that offer coverage protections, but McCain says he’ll expand high-risk pools to cover those with expensive care.

Analysis

The United Auto Workers V-CAP and the Service Employees International Union are airing ads critical of Sen. John McCain’s health care plan. They both charge that McCain’s proposals would harm workers who get health care benefits at their jobs, but some of the claims are off the mark.
 

The UAW TV ad is running in Indiana, Michigan, Ohio and Pennsylvania. It features a woman named Nicole Lowe, who says, "My son, Trevor, has asthma. … So health benefits are really important for us." She adds that McCain is "going to tax our health benefits. We’d have to pay up to 2,800 dollars a year. That’s gas money, grocery money."

She’s misinformed. In fact, Lowe and families like hers would come out well ahead under McCain’s health care plan. The $2,800 is a bogus figure. It is based on a projection of costs 10 years in the future, and it includes a key assumption that is false. Even the study that the UAW cites to justify its ad shows that Lowe would come out slightly ahead in 2009. And by adjusting for the incorrect assumption in the study, we calculate that she would still be money ahead in 2018 as well.

Under McCain’s plan, workers with employer-provided health insurance would pay income taxes on the value of those benefits. What Lowe doesn’t mention is that McCain would give her family a tax credit of up to $5,000 to cover additional income taxes. The figure she cites — a net tax increase of up to $2,800 a year — is based on a study by the liberal Center for American Progress Action Fund, which says that a couple earning $40,000 to $60,000 a year would pay that amount, even with the tax credit, 10 years from now. But there are huge problems with that estimate.

• No payroll tax: The biggest problem is that the report assumes McCain would levy Social Security and Medicare payroll taxes on the value of health benefits, in addition to federal income taxes. That’s untrue. The McCain campaign has said that only federal income taxes would go up, not payroll taxes.

  The lead author of the study, James Kvaal, told us: "When we wrote this report several months ago, the McCain campaign had not clarified its treatment of payroll taxes, but the bulk of public information supported the view that the campaign was applying payroll taxes to health benefits." The report was released July 2, and it’s true that a figure the campaign had touted as evidence that its plan was "budget neutral" indicated that payroll taxes would be levied as well. However, other reports since then, including a July Associated Press article, which ran in USA Today among other papers, and the Tax Policy Center’s analysis of the two candidates’ plans (first published in July), have made clear that McCain’s plan would subject health benefits to income taxes only.

• State Taxes: The study also assumes all workers will have to pay added state income taxes on the value of health benefits, which may or may not turn out to be the case. McCain does not specifically require that. And while many states do automatically accept federal rules about what income is taxable and what isn’t, Leonard Burman, president of the Tax Policy Center, tells us that states are likely to vary in how they would treat such a major change in the federal rules. They could offer a deduction or credit of their own.

• Future Foolery: Another problem is that the $2,800 figure is for the year 2018, after nearly a decade of inflation. The ad fools viewers by failing to mention that. Even if workers had to pay both payroll taxes (which they won’t) and state income taxes (which isn’t certain) on health benefits, the very study cited by the UAW still shows that Lowe and families like hers would come out $50 ahead in the first year of the plan.

Basing calculations on the plan McCain has actually put forth, his tax credit more than covers the taxes a family like Lowe’s would pay, even in 2018.

The Center for American Progress study says the average family premium would be nearly $25,000 in 2018, according to a Congressional Budget Office projection. We’ll accept that as a reasonable assumption. Married couples filing jointly and earning between $40,000 and $60,000 a year would face at most an income tax liability on such a health plan of $3,950. (Federal income tax brackets are adjusted automatically for inflation, so a family’s income would need to rise faster than inflation to end up in a higher bracket.) McCain’s $5,000 tax credit would be more than enough to cover the added $3,950 tax bill, even if the credit didn’t rise. And McCain proposes to increase it each year in line with inflation. If inflation is just 2 percent per year, by 2018 the credit would be worth $5,975. That would leave a family like Lowe’s ahead of their increased federal income tax bill by $2,025.

But what about state taxes? As we mentioned, McCain’s plan doesn’t require that states tax the value of health benefits. But even if they do, Lowe would still be ahead. The report that the UAW relies on assumes a "typical" state rate of 5 percent, which figures out to another $1,250 in added state taxes on the $25,000 in health benefits in 2018. Lowe’s family would still be $775 ahead, not $2,800 behind.

It’s true that some people would pay higher taxes under McCain’s plan. The Tax Policy Center estimated that the top 40 percent of income earners in the U.S. would pay more than they’d receive from McCain’s tax credit by 2018. (In 2007, the top 40 percent were households with income above $62,000.) And it’s possible that other workers with high-priced plans would face a net increase in taxes. But the figure stated in this ad is incorrect.

Kvaal, the lead author of the Center for American Progress study, wrote a blog post on Oct. 6 saying that McCain’s plan wouldn’t include payroll taxes on benefits after all. "Without higher payroll taxes, fewer families will be socked with higher tax bills," he wrote. Kvaal calculated that "[a] middle-class family paying 25 percent in income taxes and 5 percent in state taxes would pay more under McCain’s plan right away if their premiums are more than $16,700 – which would make it a relatively costly plan but hardly the most expensive out there." True – a family with a plan at that cost would pay $10 more in taxes than they’d receive with the credit – but they’d have earn more than $60,000. The original report put the "typical middle-class worker" in the 15 percent tax bracket.

More Payroll Tax Assumptions

The UAW makes one more false claim in its ad. Lowe says, "[M]y company could pay higher taxes, too." Actually, they won’t. As we’ve said, neither employees nor employers would be subject to payroll taxes on the value of health benefits. The UAW claim, like the Center for American Progress assumption, is based on the fact that the McCain campaign had said its plan would bring in $3.6 trillion over 10 years in tax revenue, an inflated figure that would be accurate only if both federal income taxes and payroll taxes are levied on the value of health benefits. The UAW also cites a report from the Economic Policy Institute, which said that the McCain proposal was not clear on this point and that "[r]evenue estimates from the McCain campaign suggest that the proposal will indeed end the payroll tax exclusion."

There may well be confusion on how much revenue the McCain plan would bring in, but we judge that the McCain campaign’s claim of a $3.6 trillion revenue gain is simply incorrect based on the plan it has described. The McCain campaign has said clearly that the plan won’t subject health benefits to payroll taxes – its Web site now says this – and in fact, it recently acknowledged that it envisions cuts in Medicare and Medicaid spending in order to finance the plan.

Update, Oct. 20: In a conference call with reporters on Oct. 17, McCain economic adviser Douglas Holtz-Eakin made clear that the campaign planned on getting "savings" from Medicare and Medicaid through such measures as reducing fraud and abuse, expanding the use of information technology in health care, and more quickly adopting generic drugs. As he made clear in the Journal article, benefits would not be cut.

[TET ]

SEIU COPE Ad: "Worried Sick"

Woman #1: How did Sam’s surgery go?

Woman #2: Good. Thank God. I don’t know how we’re going to pay all the bills. We’ve got insurance, but it doesn’t seem to cover much. He’s been out of work for two weeks.

Announcer: Worried sick about healthcare costs? John McCain’s plan won’t help. McCain’s healthcare plan would raise taxes for many families and would deny coverage for pre-existing conditions like cancer.

Woman #2: And get this. McCain wants to start taxing our benefits.

Woman #1: Maybe you should send him your bills.

Announcer: SEIU COPE is responsible for the content of this advertising.

[/TET]

Coverage Denied?

The Service Employees International Union’s ad also charges that McCain would raise taxes for "many families." And it includes the somewhat shocking charge that "McCain’s health care plan … would deny coverage for preexisting conditions like cancer."

Viewers may ask themselves how any politician could propose a plan that called for the denial of health coverage for cancer patients. In fact, McCain’s plan doesn’t say anything like that. The ad would have been correct to say that McCain’s plan doesn’t require health insurance companies to cover those with preexisting conditions. But that’s not the same as saying that the plan "would deny coverage."

SEIU bases its claim on another Center for American Progress Action Fund report, which said, "Under McCain’s plan, insurance companies would be free to ‘cherry pick’ only those individuals for coverage who do not have costly health conditions and avoid state regulations that keep health care accessible and affordable." That’s true.

Health care experts have said that McCain’s plan to allow the sale of health insurance across state lines would damage states’ ability to enact coverage requirements, as many now do. The authors of a report in the journal Health Affairs offered this blunt criticism:

Health Affairs (Sept. 16): In a national market where state licenses are not required, insurers will charter in places where regulations are scarce–much like credit card companies do today. As a result, people guaranteed basic benefits today would find those benefits eliminated under the McCain plan.

Instead of imposing mandates on insurance companies, McCain proposes the expansion of high-risk pools in states to cover those with expensive care.

This ad also says that "McCain wants to start taxing our benefits," but it fails to mention McCain’s tax credit that would cover increased taxes for most Americans.

Labor unions may well disagree with McCain’s plan, and we take no position one way or the other. But these two ads mislead viewers about what McCain actually proposes.

For more on this subject, see our report on Obama’s and McCain’s health care plans and what experts say about them.

– by Lori Robertson

Sources

Kvaal, James and Harbage, Peter and Furnas, Ben. "John McCain’s Radical Prescription for Health Care." Center for American Progress Action Fund, 2 July 2008.

IRS, 2007 Federal Tax Rate Schedules. Internal Revenue Service Web site, accessed 17 Oct. 2008.

Burman, Leonard E., et. al. “An Updated Analysis of the 2008 Presidential Candidates’ Tax Plans: Updated September 12, 2008.” Tax Policy Center, 12 Sept. 2008.

U.S. Census Bureau. Table HINC-05. Percent Distribution of Households, by Selected Characteristics Within Income Quintile and Top 5 Percent in 2007. Annual Social and Economic (ASEC) Supplement, Current Population Survey, accessed 17 Oct. 2008.

Sack, Kevin and Michael Cooper. “McCain Health Plan Could Mean Higher Tax.” New York Times, 1 May 2008.

Bivens, Josh and Elise Gould. “McCain Plan Accelerates Loss in Employer-Sponsored Health Insurance.” Economic Policy Institute, 26 Sept. 2008.

Meckler, Laura. “McCain Plans Federal Health Cuts.” Wall Street Journal, 6 Oct. 2008.

Buchmueller, Thomas, et. al. “Cost and Coverage Implications of the McCain Plan to Restructure Health Insurance.” Health Affairs, 16 Sept. 2008.