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Congressional tax bills: New loopholes

Posted November 22nd, 2017 to Blog

To most people, tax reform means closing loopholes. To those in Congress pushing an overhaul of federal taxes it apparently means the opposite. The House and Senate tax bills would reopen a number of loopholes used by high-income taxpayers to shelter income from tax, and create a huge new one. Without shame, they are calling this “tax reform.”

First, the new loophole. This one is doubly ingenuous, touted as a “reform” that helps “small business.” It allows individuals who receive income from a business that they own (if that business is not a corporation) to pay no more than the 25 percent individual income tax rate on that income. Here’s the thing: Most truly small businesses are already in that tax bracket, or lower, because they have less than $250,000 in business income; these taxpayers get no benefit from the bill.

So who would benefit? Almost 70 percent of this “pass-through” income goes to the richest 1 percent of taxpayers. They are hedge fund managers and real estate developers who own a non-corporate business, and who now pay tax at one of the top rates for individuals (up to 39.6 percent). This pass-through loophole is no help to small businesses; it is a gift to the rich, and a very costly one indeed: $597 billion over 10 years.

Now for the loopholes re-opened. If you are an ordinary, hard-working middle income taxpayer you probably have never had to worry about something called the Alternative Minimum Tax (AMT). That’s because you didn’t have income from incentive stock options, you didn’t take an oil depletion allowance, you didn’t claim net operating losses. In short, you didn’t have the kinds of income that escape taxation. You had mostly wages and salaries, which are fully taxed.

The AMT originated in the late 1960s and was supposed to ensure that those with preferentially treated income or large deductions paid at least some minimum amount of income tax. Donald Trump, for example, was required to pay an additional $31 million in 2005 because of the AMT. (We know this because of the partial tax return for that year that was made public.) Without the AMT, tens of millions of his income would have escaped taxation.

The AMT does need fixing; it does not succeed in taxing all kinds of preferential income, and many of the very rich still find ways to avoid tax. But instead of fixing it or replacing it with something better, this bill would just eliminate it permanently, at a cost of $696 billion over 10 years, a big chunk of the total cost of the bill.

In the name of tax reform, congressional Republicans are opening the loophole floodgates for high-income taxpayers; these two measures will cost $1.3 trillion. That means another $1.3 trillion in federal deficits, or in cuts to programs like Medicare and food assistance, to keep wealthy donors happy.

Peter Fisher, research director of the Iowa Policy Project

pfisher@iowapolicyproject.org


About those 10 reasons, Senator …

Posted September 22nd, 2017 to Blog

Senator Chuck Grassley of Iowa has made the point himself: The Cassidy-Graham bill to repeal the Affordable Care Act (ACA) has many deficiencies.

“I could maybe give you 10 reasons why this bill should not be considered,” he told Iowa reporters.

So, let’s look at some of the reasons, on the merits, why people might have concerns about Cassidy-Graham.

  1. People with pre-existing conditions would lose access to health care. Protection of these people assured now under the ACA would be left to state decisions, with states already cash-strapped.
  2. Many who became eligible for coverage through the Medicaid expansion of the ACA would lose it. In Iowa, about 150,000 people gained coverage by this expansion.
  3. It would change Medicaid expansion to a block-grant program that provides states no flexibility to deal with recessions or prescription drug price increases.
  4. Medicaid for seniors, people with disabilities, and families with children would be capped on a per-person basis. Anything higher would be left to the states to provide. There is neither any assurance states would want to do that, or even be financially able to do so.
  5. Iowa would be marched to a $1.8 billion cliff in 2027 under this bill, with federal support dropping sharply. For context, that is the equivalent of about one-fourth of the current state budget.
  6. Millions would lose insurance coverage. While we’re still waiting for the estimate from the Congressional Budget Office, past repeal proposals show this. And, since this bill offers nothing beyond 2027 for the Medicaid expansion, via block grant or otherwise, the prospect of 32 million people losing coverage (as demonstrated in estimates in previous ACA repeal legislation) is very real.

In Iowa? The graph below shows how Iowa’s uninsured population has dropped with the advent of the ACA, or Obamacare. Census data show uninsurance in Iowa dropped by nearly half in just three years, by about 116,000 — from 8.1 percent uninsured in 2013 to 4.3 percent in 2016.

So, this is a good start on why Iowans might be concerned about Cassidy-Graham — a last-ditch effort to rush into law radical changes in the way millions nationally and over 100,000 in Iowa gained access to health care in just three years.

We invite Senator Grassley to add to the list and get us to the full 10 reasons he suggested that might cause concerns about this bill.

Or better yet, maybe together in a deliberative process that involves everyone, we can come up with a list of 10 things that any health care policy should address.

Surely the list would include insuring more people, assuring more with practical access to health care when they need it, improving public health and reducing costs. We invite Senator Grassley to that discussion.

Mike Owen, Executive Director of the  Iowa Policy Project
mikeowen@iowapolicyproject.org


Focus on fixing insurance exchange

It’s time for Iowa’s congressmen and senators to start working on immediate measures to strengthen the health care system, and specifically the health insurance exchange, or marketplace. The obsession of some with bills to repeal and replace Obamacare has been a distraction from that task.

In recent days, bipartisan groups have sprung up in both the House and the Senate to begin developing legislation to stabilize the insurance market. These groups recognize the immediate need for measures to ensure that federal payments continue for cost-sharing reductions (CSRs) that help low-income people afford their copays and deductibles. Without the assurance that these payments will continue, premiums will rise sharply.

The president has threatened to continue his efforts to sabotage the Affordable Care Act (ACA) by ordering an end to CSRs. This threat has already prompted Medica, the only Iowa health insurance company still offering plans on the exchange, to plan for another premium increase.

The bipartisan efforts to shore up the insurance exchanges could include another important measure: a reinsurance program that would reduce the risk that a small number of high-cost customers will cause insurance company losses. The “million-dollar customer” has been cited as a factor contributing to the decisions of Wellmark and Aetna to exit the Iowa exchange. Reinsurance would establish a national pool to cover high-risk cases; this would allow companies to remain in the exchanges without drastic premium increases on everyone to pay for those few cases.

The Senate’s attempts to repeal and replace failed because they were wildly unpopular. These measures would have resulted in over 200,000 Iowans losing health insurance; would have effectively ended the expansion of Medicaid that covers thousands of low-wage workers; would have reduced Medicaid benefits for thousands of seniors, children, and people with disabilities; would have raised premiums and deductibles; would have gutted protections for persons with pre-existing conditions; and would have provided billions in tax cuts to wealthy individuals and corporations.

Another attack on coverage: Graham-Cassidy

Pragmatic efforts to stabilize the health insurance market stand in stark contrast to a last-ditch attempt to repeal and replace Obamacare that surfaced this week: the Graham-Cassidy plan. Like the previous failed bills, this plan would end the Medicaid expansion that now covers 150,000 Iowans.

Unlike previous repeal and replace bills, the Graham-Cassidy plan would also end the premium assistance that makes health insurance affordable to tens of thousands of low and moderate income Iowa families. While it replaces ACA funding of premium assistance and Medicaid expansion with a block grant, it provides no guarantee that the states will use that block grant to make health insurance affordable to those who need help the most. And the bill would further destabilize the insurance market by ending the mandate to purchase insurance, while making it more expensive, leaving insurance companies with the sickest and costliest customers.

The problems with the insurance exchange in Iowa are fixable. Let’s see if our Senators and Representatives actually try to fix those problems instead of using them as an excuse to fund tax cuts to the wealthy by forcing tens of thousands of Iowans off their health insurance.

Peter Fisher is research director of the Iowa Policy Project.

pfisher@iowapolicyproject.org


Health exchanges: Why not fix?

Posted July 12th, 2017 to Blog

What would be your response if someone said to you: “The transmission in my car needs an overhaul. This just proves vehicular transportation doesn’t work, so I am going to get rid of my car and my pickup, even though the truck is still running fine.” You would probably think they were crazy. Why not just fix the car’s transmission?

Yet this is the logic being put forward by Senator Grassley and many others as they seek to repeal Obamacare. Yes, we have a problem with the insurance exchange in Iowa, where we now have just one insurance company offering policies. But instead of pursuing solutions to that problem, our representatives are using it as an excuse to repeal Obamacare, including the Medicaid expansion, which has nothing at all to do with the insurance exchange and in fact is still in good running order.

The lack of insurers in the Iowa exchange is largely a self-inflicted problem. Insurers have left the market in part because the state of Iowa did so little to encourage people to sign up, and to provide assistance in navigating the exchanges. Iowa was also extremely generous in allowing people to continue with existing poor-quality insurance.

The problem was worsened by President Trump’s efforts to sabotage the exchanges during the final weeks of the annual sign-up in January by banning all advertising and encouraging people to think Obamacare was going to end. As a result, the number enrolling in the exchanges, which had been on a pace to exceed that of the previous year, ending up falling short.[1] Too few younger and healthier people enrolled, leaving the insurance companies with older and sicker people.

There are solutions to this problem. Both the Iowa Insurance Commissioner and Iowa Democrats have proposed measures to solve the exchange problem at the state level. But the House and the Senate bills repealing and replacing Obamacare, instead of shoring up the exchanges, repeal the individual mandate. Analyses of their replacement provisions predict that they would worsen the problem instead of solving it, leaving the exchanges with even fewer healthy individuals.[2]

Now about the pickup truck. The Senate’s Better Care Reconciliation Act (BCRA) would likely result in 232,000 Iowans losing health insurance coverage over the next five years.[3] Three-fourths of them would become uninsured because of the loss of Medicaid, the rest because of cuts in premium assistance for policies purchased on the exchange.

Iowa expanded Medicaid eligibility (with 90 percent federal funding under Obamacare) to include low-income non-elderly adults, most of whom are working in low-wage jobs with little or nothing in benefits. The BCRA would effectively end the Medicaid expansion for about 177,000 Iowans.[4] This will hit rural Iowa the hardest, and it will undermine the finances of rural hospitals.

The Medicaid expansion has nothing to do with the health insurance exchanges. Our representatives should stop using a fixable problem with the exchanges as an excuse for passing a broad bill that ends health insurance for tens of thousands of Iowans.

[1] Center on Budget and Policy Priorities, Sabotage Watch: Tracking Efforts to Undermine the ACA. http://www.cbpp.org/sabotage-watch-tracking-efforts-to-undermine-the-aca

[2] Jacob Leibenluft and Aviva Aron-Dine. Senate Health Bill Can’t Be Fixed; Reported Changes Would Not Affect Bill’s Core Features. Center on Budget and Policy Priorities, July 10, 2017. http://www.cbpp.org/research/health/senate-health-bill-cant-be-fixed

[3] Linda Blumberg et al. State-by-State Coverage and Government Spending Implications of the Better Care Reconciliation Act. http://www.rwjf.org/content/dam/farm/reports/issue_briefs/2017/rwjf438332

[4] Robert Wood Johnson Foundation and the Urban Institute. The Impact of Per Capita Caps on Federal and State Medicaid Spending. March 2017.

Peter Fisher, Research Director, Iowa Policy Project & Iowa Fiscal Partnership

pfisher@iowapolicyproject.org


A look at future health care in Senate plan

Posted July 6th, 2017 to Blog
What Iowans need to know about coverage and costs

Health care policy is a complex issue. There’s no getting around that. But one way to consider the options vs. what we have is to look at basic, reliable estimates of the real-life impacts of the policy choices. How many Iowans would have insurance, and how many would not?

The Urban Institute has state-by-state estimates of these impacts. By 2022 — five years from now — under the Senate’s proposed Better Care Reconciliation Act, uninsurance in Iowa would more than double. Across the board of various population groups, significantly more Iowans (including children) would be uninsured than under the current Affordable Care Act, (ACA, or ObamaCare).

According to the Urban Institute:

• 148,000 non-elderly adults would be uninsured, or 8 percent, under the ACA, compared with 351,000 under BCRA, or 19 percent. This is an increase of 137 percent.

• 25,000 children would be uninsured, or 3.2 percent, under the ACA, compared with 54,000 under BCRA, or 6.9 percent. This is an increase of 117 percent.

• 115,000 non-elderly, non-Hispanic white Iowans would be uninsured under the ACA, or 5.4 percent, compared with 306,000 under BCRA, or 14.3 percent. This is an increase of 167 percent.

• 38,000 non-elderly Hispanic Iowans would be uninsured under the ACA, or 16.6 percent, compared with 53,000 under BCRA, or 23 percent. This is an increase of almost 39 percent.

For more about the impacts of the Senate proposal, see this Iowa Fiscal Partnership backgrounder by Peter Fisher of the Iowa Policy Project.


KanOwaSin: Low-road neighbors, together?

Posted June 27th, 2017 to Blog

Here we sit in Iowa, nestled between two political petri dishes where experiments have gone wrong, and wondering if our elected leaders may let the mad scientists loose on us as well.

Some politicians would like to turn Iowa into another Kansas, another Wisconsin, where tax-cut zealotry already has driven down economic opportunity.

Welcome to KanOwaSin. In the anti-tax ideologues’ world, we’d all look the same. Why not ​share a name?


​Before someone squeezes another drop of anti-tax, anti-worker snake oil on us, let’s get out the microscope.Our friends in Wisconsin tell us: Don’t become Wisconsin. Our friends in Kansas tell us: Don’t become Kansas — and Kansans already are turning off the low road.A couple of researchers in Oklahoma are telling us: Listen to those folks. From the abstract of their working report:

“The recent fiscal austerity experiments undertaken in the states of Kansas and Wisconsin have generated considerable policy interest. … The overall conclusion from the paper is that the fiscal experiments did not spur growth, and if anything, harmed state economic performance.”

 

Their findings are among the latest exposing the folly of tax-cut magic, particularly with regard to Kansas, which IPP’s Peter Fisher has highlighted in his GradingStates.org analysis that ferrets out the faulty notions in ideological and politically oriented policies that tear down our public services and economic opportunity.

Iowa has long been ripe for tax reform, due to a long list of exemptions, credits and special-interest carve-outs in the income tax, sales tax and property tax. These stand in the way of having sufficient resources for our schools, public safety and environmental protection.

Each new break is used to sell Iowans on the idea that we can attract families and businesses by cutting  — something we’ve tried for years without success, as Iowa’s tortoise-like population growth has lagged the nation.

On balance, this arrangement favors the wealthy over the poor. The bottom 80 percent pay about 10 percent of their income in state and local taxes that are governed by state law. The top 1 percent pay only about 6 percent. Almost every tax proposal in the last two decades has compounded the inequities.

For the coming 2018 legislative session, and for the election campaigns later that year, we are being promised a focus on income tax. Keep in mind, anything that flattens the income tax — the only tax we have that expects a greater share of income from the rich than the poor — steepens the overall inequity of our regressive system.

Thus, as always, the devil is in the details of the notion of “reform.” If “reform” in 2017 and beyond means more breaks for the wealthy, and inadequate revenue for traditional, clearly recognized public responsibilities such as education and public health and safety, then it is not worthy of the name.

So, when you hear about the very real failures of the Kansas and Wisconsin experiments, stop and think about what you see on your own streets, and your own schools. Think about the snake oil pitches to follow their lead, and whether you want Iowa on a fast track to the bottom.

That is the promise of Kansas and Wisconsin for Iowa.

Or, if you prefer, KanOwaSin.

—-

Dan S. Rickman and Hongbo Wang, Oklahoma State University, “Tales of Two U.S. States: Regional Fiscal Austerity and Economic Performance.” March 19, 2017. https://mpra.ub.uni-muenchen.de/79615/1/MPRA_paper_79615.pdf
Posted by Mike Owen, Executive Director of the Iowa Policy Project
mikeowen@iowapolicyproject.org

AHCA would hit Iowa hard

Coverage losses in House AHCA sets low bar for Senate, White House;

AHCA would impose dramatically higher costs for Iowa and Iowa residents

Basic RGB

 

News release

By Peter Fisher

The American Health Care Act (AHCA) passed by the House of Representatives would cut health insurance for nearly 200,000 Iowans in order to provide billions in tax cuts to wealthy individuals, drug companies, and insurance companies. Moreover, instead of fixing the problems with Iowa’s health insurance exchange, it would make those problems worse. As the Senate uses this legislation as the basis for its own proposal, supporters’ promises of more state flexibility and individual choice ring hollow. So-called “flexibility” means an enormous cost shift requiring the state to spend millions more and cut services. Meanwhile, “choice” for thousands of Iowans would be stark: go without health insurance that had become unaffordable, or go without basic necessities such as food.

The AHCA would fundamentally change Medicaid in two ways. First, it eventually would end the Affordable Care Act — or Obamacare — expansion of Medicaid, through which 150,000 low-income Iowans have gained coverage. Second, the AHCA would cut federal funding for the overall Medicaid program, which would force Iowa to find an estimated $336 million more in the state budget for 2023 in order to maintain current eligibility. Given Iowa’s chronic budget shortfalls, this is very unlikely to happen. As a result, the state would likely be forced to restrict Medicaid eligibility and cut benefits to children, the elderly and the disabled.

Altogether, some 191,100 Iowans — 38.1 percent of the nonelderly adult enrollees now served — could lose Medicaid under the House plan, according to new analysis by the Urban Institute.[1] This would make Iowa one of the biggest losers nationally, as only 11 states have greater shares of their Medicaid enrollees in jeopardy of losing coverage. Nationally, the loss is set at 1 in 4 enrollees.

The AHCA hits rural and elderly Iowans the hardest, both from the cuts in insurance subsidies and the cuts in Medicaid. In Iowa’s 78 counties outside metropolitan areas, a family of four with $40,000 income would face an average net increase in premiums (after subsidies) of $7,607 per year; their cost would about double. For an elderly couple with the same income, the increase would average $14,582. The likely loss of the Medicaid expansion would disproportionately harm rural Iowans, who are more likely to have health issues and difficulty paying for health care.

One of the most disingenuous claims by AHCA architects is that Americans with pre-existing medical conditions — now protected by the ACA — would keep that protection under AHCA. In fact, AHCA creates a state option to let insurance companies charge higher premiums and scale back coverage of now-required “essential health benefits.” The requirement that insurance companies cannot deny coverage is a hollow one, if they can simply price people out of it, or drop benefits they do not want to cover. And the fig-leaf funding provided by the bill would not nearly compensate for the costs to the millions facing these higher prices, including 1.3 million persons in Iowa with pre-existing conditions.

AHCA problems do not end there. The quality of health insurance policies is sure to decline as states choose to waive requirements for essential health coverage. By allowing states to eliminate the federal “essential health benefits,” the AHCA would permit employer plans to reinstate annual or lifetime benefit limits, and to stop capping out-of-pocket maximum for certain coverage. This would put millions again at risk of catastrophic costs and medical bankruptcy.

The AHCA Would End Medicaid as We Know It

The AHCA makes two very significant changes to Medicaid. It alters the way states are reimbursed for the Medicaid expansion population, and it changes the way the overall Medicaid program is financed.

Traditional Medicaid consists primarily of health insurance for low-income children, some parents of those children, low-income seniors, and the disabled. About 3 in 8 children in Iowa, 286,000 in total, get health care through Medicaid. One in 4 Iowans with a disability receive Medicaid, about 90,000 individuals. And about 46,000 seniors receive Medicaid to pay for nursing home care, or in-home care that allows them to remain in their homes.

Currently, the federal government pays about 58.5 percent of the cost of traditional Medicaid in Iowa. When recession hits, or an epidemic of flue or opioid addiction strikes Iowans, the federal government automatically matches any needed additional Medicaid payments. Under the ACA, a significant expansion of Medicaid brought health coverage to an additional 150,000 low-income adults in Iowa, with the federal government covering 90 percent of the cost.

AHCA Would Likely Force an End to Iowa’s Medicaid Expansion

The ACA extended Medicaid eligibility to adults with incomes up to 138 percent of the poverty level (about $16,600 a year for an individual) in states that agreed to take part. The majority of those adults are working, most likely at low-wage jobs without meaningful or affordable health insurance, if health insurance is offered at all. In Iowa, nearly 9 in 10 adult Medicaid recipients are in working families, and 7 in 10 are working themselves.[2] Nationally, the majority of working Medicaid recipients were in full-time jobs; of those not working, most were in school, were caretakers for a relative, reported an illness or disability that prevented them from working, or were unable to find work.

In Iowa, about 150,000 adults gained health insurance through this expansion as of 2016.  That number is expected to grow to 177,000 by 2019.[3] Some were previously covered by Iowa Care, a program with limited benefits that ceased to exist when those individuals were moved to the full Medicaid expansion program, known as the Iowa Health and Wellness Plan. The expansion has been a major success. In the 31 states that adopted the Medicaid expansion the percent of non-elderly adults without insurance was cut in half — from 18 percent to 9 percent. [4]

Some proponents of the AHCA have stated that “no one will be thrown off Medicaid.” This is not accurate. Under the ACA, the federal government paid the entire cost of covering those enrolled in the Medicaid expansion through 2016, and at least 90 percent going forward. Beginning in 2020, the AHCA would repeal that high match rate for any new enrollee, including anyone currently in the program who does not maintain continuous enrollment.[5] In practice, most recipients use Medicaid for relatively short spells, due to unemployment or other financial setbacks. As Medicaid recipients cycle on and off the program, within just a few years, the vast majority of those now covered by the Medicaid expansion will no longer be eligible for the enhanced federal match. The nonpartisan Congressional Budget Office estimates that in just five years, fewer than 5 percent of those in the expansion would remain on Medicaid.[6]

This means that under the AHCA, Iowa would have to come up with 41.5 percent, instead of 10 percent, of the cost of the Medicaid expansion, because the federal match would fall from 90 percent to the state’s regular rate of 58.5 percent.[7] To maintain current eligibility with the lower match, Iowa would have to dip into its own revenue to come up with an additional $192.5 million in 2021, an increase of 191 percent.[8]  By 2023, the state’s additional cost would be $335.8 million, a 288 percent increase over current spending on the expansion population. It is highly doubtful that the state would find that much more in its budget for Medicaid.

Per Capita ‘Cap’ Funding Would Shift Costs to States

The second major cut to Medicaid under the AHCA is a dramatic shift in how the overall Medicaid program is funded. Currently the federal government pays 58.5 percent of total Medicaid costs in Iowa, regardless of how those costs rise due to a recession, rising health costs or new health care crises. Under the AHCA the federal contribution will be set at a flat per capita amount. The Medicaid population will be segmented into five groups based on eligibility: those with a disability, the elderly, non-disabled children, non-disabled non-elderly adults, and the non-elderly adults in the Medicaid expansion group. Caps would start with federal Medicaid spending in 2016 and then rise each year, at a slower rate than Medicaid per beneficiary spending is currently projected to rise.

As a result, the federal government would save billions of dollars through the shift to per capita funding, with the amount growing substantially over time. The projected federal savings will come at the expense of state budgets and the low-income individuals served by Medicaid. It is unlikely that state spending will rise to fully offset the loss in federal funds. The state would then have to cut benefits, eliminate optional Medicaid programs, or restrict eligibility.

There are several reasons why the disparity between actual per capita costs and the per capita reimbursement will widen over time. First of all, the annual growth rate in Medicaid costs is expected to exceed the inflation factor that will be applied to the per capita cap. Second, within each eligibility group, there are likely to be demographic shifts toward higher-cost individuals, particularly the elderly. Actual health costs will also be driven up by such factors as:

  • New medical procedures or devices that are more effective, but more costly
  • Medical emergencies, such as an outbreak of the flu, or the Zika virus
  • Health care crises such as the epidemic of opioid addiction.

Probably the most important danger with the AHCA per-capita cap is the “demographic time bomb.” The population is aging, in Iowa and throughout the country. As the Baby Boomer bubble works its way through the elderly population, seniors will become older on average. The share of Iowa’s seniors who are age 75 or older is expected to rise from 42.6 percent in 2020 to 47.3 percent by 2030, and then 55.7 percent by 2040.[9] This is significant because Medicaid spending per capita is much higher for the “old old” than for the “young old.” Average Medicaid spending per recipient for those age 85 or older is 2.5 times the amount spent per recipient age 65 to 74.[10]

Growth in the per capita Medicaid reimbursement for the elderly population will be based forever on Iowa’s level of spending for all seniors as of 2016, before the boom in Medicaid’s aging population. The rising cost of Medicaid for seniors, as they become on average older and sicker, will not be matched by the federal government. That will stick the state of Iowa with higher costs, cause cuts in benefits to seniors, or both. One program that could very well end up on the chopping block is in-home health care, an important program that allows seniors to receive needed services while remaining at home, rather than in a nursing home, which is more expensive.

None of this is a fluke, or an unintended consequence of the AHCA. To the proponents, it is a measure of the success of that legislation — to shift costs and risk from the federal government to the states, health-care providers, and to the low-income populations served by Medicaid. The states will have to make the hard choices — who gets served, who gets cut. The elderly and the sick will suffer the consequences.

In the long term, a shift to per capita caps could be even more detrimental because they present a clear target for federal budget cuts. This potential is evidenced by President Trump’s recently released budget. Even before the AHCA is introduced in the Senate, the President has proposed to reduce the growth rate for the per capita caps in future years, below the rate in the House bill.[11]

The Cuts to Medicaid Would Hurt Rural Iowa the Most

The Medicaid expansion greatly increased access to health coverage in Iowa’s rural areas, where the percent of non-elderly residents who were uninsured was cut nearly in half between 2013 and 2015.[12] Those historic gains in coverage are threatened by the AHCA. Rural residents are more likely than urban residents to have a disability or other health issue, to be unemployed, or to be poor. In other words, the need for Medicaid is greater.

Private Insurance Would be More Costly to Millions, Leaving Many Uninsured under AHCA

The Affordable Care Act (“Obamacare”) barred insurance companies from a number of harmful practices that used to be common in the individual market. Insurers used to be able to leave out benefits, such as prescription drugs and maternity care, but now must cover a comprehensive set of 10 “essential health benefits” and cap the amount of deductibles and other out-of-pocket costs each person can be required to pay each year under their plan. Insurers also used to be able to impose limits on benefits that they would pay out each year or over a person’s lifetime, leaving people exposed to catastrophic costs even though they had coverage. Insurers also must issue insurance to anyone, regardless of pre-existing conditions, and cannot vary premiums only by gender or health status. People in their 60s cannot be charged more than three times the premium of people in their twenties for the same plan; older people used to have to pay far more. To make these protections possible, the ACA required people to purchase insurance or pay a penalty. Without that requirement, healthy individuals would wait until they got sick to purchase insurance, and without healthy individuals in the pool, the insurance market would not be viable. ACA subsidies help low- and moderate-income people pay their premiums; cost-sharing subsidies help reduce deductibles and other out-of-pocket costs for low-income people.

The House-passed AHCA would immediately repeal the requirement for individuals to have coverage or pay a penalty, causing an estimated 20 percent increase in individual-market premiums in 2018, all else equal.[13]  The bill would also drastically reduce the help that modest-income people get with paying their premiums, deductibles, and other costs. Insurers would still have to issue plans to everyone, regardless of health status, but they would have be given other tools to reduce their coverage of people with medical needs. The bill would allow insurers to offer only high-deductible plans, and not plans with lower deductibles that are now required in the marketplaces. The bill would allow insurers to charge older people up to five times more than younger people for the same plan — far greater than the current ratio of three to one.

In addition, the AHCA creates state waivers that would allow insurers to further roll back consumer protections — waivers that about half the states, including possibly Iowa, would be expected to take.[14] All told, the individual insurance market would look much like it did prior to the ACA, with far fewer people covered and people with pre-existing conditions blocked from getting affordable coverage that meets their needs.

The AHCA Allows States to Lower Insurance Standards

States could apply for three important waivers under the AHCA:

  • Starting in 2018, states can allow insurers to charge older people even more than five times what younger people pay, further raising premiums for seniors purchasing coverage individual market.
  • Starting in 2019, states can allow insurers to charge to effectively end the pre-existing condition provisions of Obamacare; states could allow insurers to charge higher premiums to people based on their health conditions.
  • Starting in 2020, states can eliminate the requirement that insurers must cover 10 categories of essential health benefits in individual and small group insurance plans.

About 1.3 million Iowans had pre-existing conditions that could have disqualified them from health insurance in 2009, according to the U.S. Department of Health and Human Services.[15] Of those, 174,000 are children, and 319,000 are age 55 to 64,[16] the group facing the highest premiums on the private market under the House-passed AHCA. Iowa could, of course, keep the ACA pre-existing condition protections in place to protect those with pre-existing conditions, who represent about half of the entire population under age 65. However, the state would be under heavy pressure to seek one or more waivers to permit insurers to sell lower-premium, skimpier coverage that might attract healthier people — even tough the House bill would remove the penalty for being uninsured and people would get far less help paying their premiums.

Protections against Catastrophic Costs Could Disappear

While the Obamacare prohibition on lifetime or annual limits on benefits would technically remain in place under the AHCA, this applies only to coverage of the 10 essential health benefits. States could obtain a waiver to remove some or all of those essential benefits from the required list. This would allow insurance companies to impose annual or lifetime limits on payments for benefits no longer defined as essential. Similarly, the Obamacare requirement that policies limit maximum spending by individuals on deductibles and other out-of-pocket costs each year protects people from catastrophic costs, but this provision again applies only to the essential health benefits.

To see how this could work in practice, suppose a state receives a waiver to remove maternity care from the list of essential health benefits for policies issued in that state. Insurance companies might still offer policies that include maternity care. But those policies could now limit what they will pay when an enrollee has a baby, and they could exclude maternity services from the plan’s out-of-pocket maximum. This in turn puts the enrollees at risk of catastrophic costs, which could lead to medical bankruptcy. For example, a child birth that requires a C section, or a few days of care in the neonatal intensive care unit, could easily cost over $200,000. A person with maternity coverage might find herself to be responsible for most of that cost, because there is no out-of-pocket maximum for the insured, but there is a limit on what the insurance company will pay.

Even people with employer coverage could find weakened protections against high cost sharing under the AHCA. That is because the ACA prohibition against annual and lifetime limits, as well as the cap on yearly cost-sharing amounts, applies to virtually all private insurance plans. About 1.1 million Iowans would have a policy with a lifetime benefit limit were in not for the ACA.[17]

The AHCA Drastically Changes Insurance Premium Subsidies

Under current law, premium credits are available to people with low or moderate incomes, to help make it affordable to buy a plan. The credits are based on enrollees’ incomes as well as the actual cost of the premium for a plan in the place the person lives. The ACA also provides cost-sharing reductions (CSRs) that lower deductibles and co-payments that people with low incomes pay under their marketplace plans. In 2016, the average Iowan purchasing insurance on the exchange who was eligible for the credit had to pay only 29 percent of the premium, the rest being covered by the credit.

The AHCA would substitute a flat tax credit that is the same regardless of income, and regardless of whether someone lives in an area with high premiums or low premiums. The size of the credit varies only by age, from $2,000 for persons under 30 to $4,000 for those age 60 or older. For the average Iowan purchasing insurance with subsidies, the effect of the AHCA is to increase overall costs by $3,900 per year. Premiums would increase nearly $300, the tax credits would decline by $2,685, and cost sharing in the amount of $926 would be lost.[18]

For older Iowans, who face much higher health insurance premiums to start with, the AHCA would cause a staggering increase in costs. A 60-year-old pays on average just $1,183 in net premiums, after credits, under the ACA. But under the House bill, that net premium would jump to $9,614, an $8,431 increase.[19]

These averages conceal wide variation across counties in Iowa, with rural counties generally hit the hardest:

  • For a family of four with $40,000 income, the increase in the family’s costs under the AHCA varies from $1,100 to $10,050. In 63 of Iowa’s 99 counties, the loss of premium subsidies would exceed $8,400, and all but six of those are rural counties. (See map below.)
  • For an elderly couple with no children at home and with the same $40,000 income, the AHCA would cause them to lose premium assistance ranging from $5,940 to $17,830. In 63 counties the premium credit loss would exceed $15,700, and once again, all but six of those counties are rural.

If we focus instead on the 20 counties where the credit loss would be the smallest, both for the family of four and for the senior couple, we find 12 of those 20 counties are in metropolitan areas.

In the map below, the lighter-shaded counties, with black lettering, are those where the tax-credit losses in 2020 are projected under AHCA to be above $8,000 for four-person families with $40,000 income, and above $15,000 for 60-year-old couples with $40,000 income. The light-yellow counties are in metro areas; the light-green counties non-metro areas.

170621-ahca-metroSource: Henry J. Kaiser Family Foundation

The average premium increase in Iowa’s 21 metro counties (those within one of the nine Census-designated metropolitan areas) is $3,517 for the family of four, $9,150 for the senior couple.  For the 78 non-metro counties, the average premium increases would be $7,607 for the family of four (about double), and $14,582 for the senior couple.[20]

The AHCA Provides a Windfall for Corporations and the Wealthy

The ACA is financed in large part by two Medicare taxes that fall only on individuals with incomes above $200,000 or couples with incomes above $250,000. The AHCA would repeal these taxes.  Millionaires would get 79 percent of the benefit if these taxes were ended.[21] The 400 richest households in the country would receive a $2.8 billion windfall, for an average tax cut of about $7 million a year for each household. The AHCA also repeals taxes on insurance companies, pharmaceutical companies, and other corporations.

The AHCA Would Not Fix Iowa’s Insurance Exchange Problems

Iowa’s insurance exchange is in trouble as insurers exit the market. The principal reason is that too few young, healthy individuals purchased insurance on the exchange. While this has been something of a problem nationally, it is more severe in Iowa. Few Iowans eligible to purchase plans through the exchange actually did so: In 2016, only 20 percent of eligible marketplace enrollees actually purchased insurance, compared to a national average of 40 percent.[22] This is due in part to poor outreach by the state to inform consumers about the benefits of enrollment — and the state even turned down federal funds for this purpose in 2013.

In addition, the ACA was designed to eliminate poor-quality health insurance plans that covered too few health benefits, capped insurance company payouts, or had no limits on a patient’s out-of-pocket expense. But individuals could seek a waiver that would allow them to retain their old policies — plans that did not meet new standards for benefits or pre-existing conditions — Iowa’s insurance regulators were very generous in allowing such waivers.[23] As a result, many young, healthy people kept their old plans because they were cheap. Without those people in the exchanges, the insurance companies offering ACA plans were left with a pool of people who were sicker, older and cost more to cover. Compounding the issue in Iowa, the state’s largest insurer, Wellmark, opted to continue covering tens of thousands of individual-market customers on their old plans and also decided not to offer coverage through the exchange for the first three years. This likely contributed to the relatively low portion of Iowans moving to ACA coverage through the exchanges. In recent years, Wellmark has had more enrollees in its pre-ACA plans than the total number of all exchange enrollees, splitting up the state’s individual market.[24]

There has been speculation about the impact on the Iowa exchange because of one very expensive patient, whose health bills exceed $1 million per month. That person was insured by Wellmark, and when Wellmark pulled out of the exchange after only one year, other insurers may have feared they would have to insure that person, a deterrent to their market participation.[25]

One potential solution to this problem is a reinsurance pool, and though one exists under the ACA, it will not kick in until 2018. The uncertainty surrounding the future of the ACA only adds to the risk that insurers see if they remain in the market. The AHCA solution is to put the high-cost individuals in a state high risk pool. The AHCA, however, provides only about a third to a fifth of what is needed to fund insurance for all who need it; the result would be very high premiums for those in the pool, or millions left out of coverage.[26]

Meanwhile, the Iowa Insurance Commissioner has filed a plan to salvage the Iowa exchange by requesting a waiver under the Affordable Care Act.[27] There would be a single insurance plan available throughout the state, similar to the mid-level or “silver” plan now available on the ACA marketplace. The plan would cover the ACA’s 10 essential health benefits, and retain protections for pre-existing conditions without any annual or lifetime benefit caps. The proposal also incorporates an element of the AHCA, raising the age ratio, so that premiums for older Iowans would increase more. Premiums would rise for all age levels, as would the credit, which would be based on income just as it is under the ACA. The net premiums would be higher; for example, a family of four at 200 percent to 250 percent of the poverty level would pay $212 more per month, a 53 percent increase, while a couple in their late 50s would pay $236 more per month, an 82 percent increase. The state’s largest insurer, Wellmark, has said it would offer the plan in all 99 counties if the proposal is approved in a timely fashion.[28]

Conclusion

The Iowa experience should serve as a warning to other states about what will happen if the AHCA becomes law. That’s because the AHCA would allow all states to waive requirements about essential health benefits, and if they do so that will bring back cheap policies with poor coverage, caps on benefits, and no ceiling on out-of-pocket costs. In other words, states will be free to abandon the principle of one large pool of insured, and instead segment the market, encouraging the young and healthy to buy these cheap policies allowed under the waiver. This would leave the older and sicker on the better policies that remain compliant with the ACA. That in turn may cause insurance companies to abandon such compliant policies, leaving the states back where they were before health care reform.


[1] John Holahan, Linda J. Blumberg, Matthew Buettgens and Clare Pan. Impact of the AHCA on Federal and State Medicaid Spending and Medicaid Coverage: An Update. Urban Institute. June 2017. This analysis assumes that states drop their ACA low-income adult Medicaid expansion population and cut Medicaid enrollment among other non-elderly adults to fully compensate for federal Medicaid funding cuts due to reduction in expansion matching rate and to per capita cap. http://www.rwjf.org/content/dam/farm/reports/issue_briefs/2017/rwjf438186

[2] Rachel Garfield, Robin Rudowitz, and Anthony Damico. Understanding the Intersection of Medicaid and Work. Issue Brief. Kaiser Family Foundation, February 2017. http://www.kff.org/medicaid/issue-brief/understanding-the-intersection-of-medicaid-and-work/

[3] John Holahan et al. The Impact of Per Capita Caps on Federal and State Medicaid Spending.The Urban Institute. March 2017. www.urban.org/sites/default/files/publication/89061/2001186-the_imapct-of-per-capita-caps-on-federal-spending-and-state-medicaid-spending_2.pdf

[4] Matt Broaddus and Edwin Park. House Republican Health Bill Would Effectively End ACA Medicaid Expansion. Center on Budget and Policy Priorities. June 6, 2017.

[5] Anyone who has not been enrolled in Medicaid for two months is considered a new enrollee under the AHCA.

[6] Of those enrolled in the Medicaid expansion at the end of 2019, when the federal 90 percent match is scheduled to end, fewer than five percent would still be on Medicaid by the end of 2024. Congressional Budget Office, “American Health Care Act,” March 13, 2017. https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/americanhealthcareact.pdf

[7] The matching rate, or FMAP, for fiscal year 2018 is 58.5 percent. http://www.kff.org/medicaid/state-indicator/federal-matching-rate-and-multiplier/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

[8] Matt Broaddus and Edwin Park. House Republican Health Bill Would Effectively End ACA Medicaid Expansion. Center on Budget and Policy Priorities. June 6, 2017.

[9] University of Virginia, Weldon Cooper Center for Public Service, Demographics Research Group. http://demographics.coopercenter.org/national-population-projections/?q=demographics/national-population-projections

[10] Matt Broaddus. Population’s Aging Would Deepen House Health Bill’s Medicaid Cuts for States. March 24, 2017. Center on Budget and Policy Priorities. http://www.cbpp.org/blog/populations-aging-would-deepen-house-health-bills-medicaid-cuts-for-states

[11] Edwin Park. “Trump Budget Cuts Medicaid Even More than House Health Bill, Showing Danger of Per Capita Cap.” Center on Budget and Policy Priorities, May 23, 2017. http://www.cbpp.org/blog/trump-budget-cuts-medicaid-even-more-than-house-health-bill-showing-danger-of-per-capita-cap

[12] Kaiser Family Foundation. Changes in Insurance Coverage in Rural Areas under the ACA: A Focus on Medicaid Expansion States. May 4, 2017. http://www.kff.org/medicaid/fact-sheet/changes-in-insurance-coverage-in-rural-areas-under-the-aca-a-focus-on-medicaid-expansion-states/

[13] Edwin Park, “New CBO Estimates: 23 Million More Uninsured under House-Passed Republican Health Bill,” Center on Budget and Policy Priorities, May 24, 2017.

[14] Park, op cit.

[15] https://aspe.hhs.gov/compilation-state-data-affordable-care-act

[16] Emikly Gee. Number of Americans with Pre-Existing COnditions by Congressional District. Center for American Progress, April 5, 2017. https://www.americanprogress.org/issues/healthcare/news/2017/04/05/430059/number-americans-pre-existing-conditions-congressional-district/

[17] Loren Adler and Paul B. Ginsburg. Health Insurance as Assurance: The Importance of Keeping the ACA’s Limits on Enrollee Health Costs. The Brookings Institution, January 17, 2017. https://www.brookings.edu/blog/up-front/2017/01/17/health-insurance-as-assurance-the-importance-of-keeping-the-acas-limits-on-enrollee-health-costs/

[18] Aviva Aron-Dine and Tara Straw. House GOP Health Bill Still Cuts Tax Credits, Raises costs by Thousands of Dollars for Millions of People. Center on Budget and Policy Priorities, March 22, 2017.

[19] Aviva Aron-Dine and Tara Straw. House GOP Health Bill Still Cuts Tax Credits, Raises costs by Thousands of Dollars for Millions of People. Center on Budget and Policy Priorities, March 22, 2017.

[20] These are population-weighted averages, computed by weighting the premium increase for a county by its share of the total population in the metro or non-metro counties as of 2016.

[21] Chye-Ching Huang, Chuck Marr and Emily Horton. House GOP Health Plan Eliminates Two Medicare Taxes, Giving Very Large Tax Cuts to the Wealthy. Center on Budget and Policy Priorities, March 20, 2017. http://www.cbpp.org/research/federal-tax/house-gop-health-plan-eliminates-two-medicare-taxes-giving-very-large-tax-cuts

[22] The Henry J. Kaiser Family Foundation. Marketplace Enrollment as a Share of the Potential Marketplace Population.

March 31, 2016.

[23] Catherine Rampell. “Want to know what Trumpcare would do to the country? Look at the implosion in Iowa.” The Washington Post, May 22, 2017.

[24] Andrew Sprung. “Why insurers thrive (or dive) in ACA marketplaces. healthinsurance.org. April 28, 2016. https://www.healthinsurance.org/blog/2016/04/28/why-insurers-thrive-or-dive-in-aca-marketplaces/

[25] Tony Leys. “Iowa teen’s $1 million-per-month illness is no longer a secret.” Des Moines Register, May 31, 2017. http://www.desmoinesregister.com/story/news/health/2017/05/31/hemophilia-patient-costing-iowa-insurer-1-million-per-month/356179001/

[26] Linda J. Blumberg, Matthew Buettgens, and John Holahan. High-Risk Pools Under the AHCA: How Much Could Coverage Cost Enrollees and the Federal Government? Robert Wood Johnson Foundation and the Urban Institute, May 2017. http://www.rwjf.org/en/library/research/2017/05/high-risk-pools-under-the-ahca.html

[27] Iowa Insurance Division. The State of Iowa’s Proposed Stopgap Measure for the Individual Health Insurance Market. June 12, 2017. https://iid.iowa.gov/sites/default/files/state_of_iowa_proposed_stopgap_measure_6.12.2017.pdf

[28] Ed Tibbets. “Iowa floats plan for insurance markets.” Quad-City Times. June 12, 2017. http://qctimes.com/news/local/government-and-politics/iowa-floats-plan-for-insurance-markets/article_27ed8402-ff25-5651-94b2-af42ec5e18ef.html#utm_source=qctimes.com&utm_campaign=%2Femail-updates%2Fbreaking%2F&utm_medium=email&utm_content=A610FFEAA69F54B0BB4F3A1FAD0FDDDEB0B2C7DF

pfisher240200Peter Fisher is Research Director of the Iowa Policy Project, part of the Iowa Fiscal Partnerhsip (IFP). IFP is a joint public policy analysis initiative of two nonpartisan, nonprofit organizations based in Iowa: the Iowa Policy Project in Iowa City, and the Child & Family Policy Center in Des Moines.

AHCA: Shifting Costs to States

FOR IMMEDIATE RELEASE TUESDAY, JUNE 6, 2017

Cutting Medicaid Expansion: Huge Cost Shift to Iowa, Other States

IOWA CITY, Iowa (June 6, 2017) — A new report shows Iowa would have to spend almost three times what it does now to cover low-income adults who would lose health coverage under the House-passed American Health Care Act (AHCA).

To keep up the benefit to those families, AHCA would force Iowa and the 30 other states that expanded Medicaid to absorb a greater share of the cost. The Center on Budget and Policy Priorities (CBPP), estimates the cost to Iowa to rise $192.5 million in 2021.

“This is an enormous cost-shift to Iowa, and we already have seen our state’s leaders cutting back revenues, and trying to cut more. Facing those fiscal constraints already, it is hard to see how the state could pick up those costs, which puts health coverage for many thousands of Iowans in jeopardy,” said Mike Owen, executive director of the nonpartisan Iowa Policy Project (IPP).

The new analysis by the Center on Budget and Policy Priorities shows that Iowa’s costs would continue to soar. By 2023, the state would have to find an additional $335.8 million to maintain coverage for people benefiting from the Medicaid expansion. That would be a 288 percent increase from the cost under current rules.

“The real question is whether Iowa’s political leaders on both sides of the aisle are willing to speak up about this to assure Iowa’s senators, Charles Grassley and Joni Ernst, are aware of the decisions being put on state lawmakers’ plates,” Owen said.

Peter Fisher, IPP research director, noted that about 150,000 Iowans benefit from the Medicaid expansion, which was part of the Affordable Care Act (ACA).

“Many thousands of Iowans have health coverage now because of the ACA and the Medicaid expansion,” Fisher said. “As we have stated before, any plan to replace ACA can be judged on how well those gains are maintained.

“The House bill would at best jeopardize the gains, and with higher costs for insurance, almost guarantee far greater numbers of Iowans would be uninsured.”

The CBPP report estimates the bill would jeopardize coverage for 11 million newly eligible low-income adults who enrolled in Medicaid under the expansion.

The report is available at http://www.cbpp.org/research/health/house-republican-health-bill-would-effectively-end-aca-medicaid-expansion.

In states that adopted the Medicaid expansion, the federal government pays at least 90 percent of the expansion costs — an enhanced rate compared to the regular Medicaid program. This change cut uninsurance rates in half for non-elderly adults in Medicaid expansion states, from 18.4 percent in 2013 to 9.2 percent in 2016.

Under the AHCA, however, the federal government would pay only the regular Medicaid matching rate, 58.5 percent in Iowa, for new enrollees beginning in 2020. Anyone whose Medicaid coverage lapses for more than two months becomes a new enrollee. Because Medicaid recipients cycle on and off the program, in the space of just a few years most enrollees would be “new,” and would lose Medicaid coverage altogether unless the state came up with the millions required to keep them on.

With the loss of the Medicaid expansion, the percent of Iowans who are uninsured could rise to levels even higher than existed prior to Obamacare. That is because those individuals who received some coverage from IowaCare, and who since moved to the Medicaid expansion, would not have IowaCare to fall back on when the expansion ends.

The Iowa Policy Project is a nonpartisan public policy analysis organization based in Iowa City. IPP and the Child & Family Policy Center in Des Moines together analyze fiscal policy issues as the Iowa Fiscal Partnership, www.iowafiscal.org.

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Health care ‘reform’ gets worse

Posted April 27th, 2017 to Blog

The House Republican plan to replace Obamacare (the Affordable Care Act) with the American Health Care Act (AHCA), which a few weeks ago failed to even come to a vote, has been reincarnated. The new version of the AHCA has apparently won the support of the Freedom Caucus in the House, but in so doing has become significantly worse for millions of Americans.

Here are the key points about this new attempt to “repeal and replace” Obamacare:

  • Despite repeated promises to keep the most popular part of Obamacare, the provision prohibiting insurance companies from refusing to cover those with pre-existing conditions, the new version returns us to the bad old days. While a particular state may choose to keep the prohibition, there is no longer any nationwide requirement that insurance companies issue affordable policies regardless of pre-existing conditions.
  • Nationwide standards for health insurance policies will be rolled back; plans will no longer be required to cover services such as mental health, maternity care, or substance abuse treatment.
  • The nationwide prohibition on lifetime and annual limits on benefits will be gone, meaning the possibility of medical bankruptcy will loom once again for many.
  • The modified version of the bill still effectively ends the Medicaid expansion; about 150,000 Iowans now covered under that provision could lose insurance altogether.
  • The bill still cuts $840 billion from Medicaid over 10 years, most of the savings going to wealthy individuals, drug companies, insurance companies, and other corporations.
  • Premiums and deductibles will still rise for large numbers of persons buying insurance on the exchanges, especially for the elderly, those with lower incomes, and those in high-cost states or areas, such as most of rural Iowa.
  • Under the bill, there would be no limit on the premium an insurance company can charge based on medical history; thus someone with pre-existing conditions could in theory be offered coverage, but at a cost that is simply unaffordable. There is little difference between this situation and straight denial of coverage. A state could choose to prohibit this practice (i.e., to keep the Obamacare provision in place), but few states chose to do so before Obamacare.

While the proponents of this revised plan may argue that it keeps the prohibition on gender discrimination, a woman would pay substantially more for a plan that included maternity coverage. Such coverage would not be a required part of all plans, but instead would be an expensive option.

Just how this revised bill would affect overall coverage rates, premiums, and out-of-pocket costs, awaits a new analysis by the Congressional Budget Office. But it is quite possible that the bill will be voted on in the house without the benefit of that analysis. Part of the pressure to pass the bill now comes from the desire on the part of the Trump administration to come up with large savings to the federal government that can then be used to finance cuts to corporate and individual income taxes.

The bottom line: worse health care coverage at higher cost to millions, loss of coverage entirely to millions more, in order to finance tax cuts for corporations (and probably millionaires as well).

Posted by Peter Fisher, research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org

Also see Fisher’s March 2017 policy brief for the Iowa Fiscal Partnership: “Replacing ACA: What you need to know about the AHCA.”


Real tax reform: What elements?

Not the same list they’re using at the State Capitol

IFP POLICY BRIEF

Basic RGB

 

By Peter Fisher

We should all welcome a serious discussion of tax reform in the Iowa Legislature, with one huge caveat: It should focus on real issues, not made-up ones. There are real issues: Business tax credits continue to grow much faster than other state spending, and contribute significantly to the budget shortfalls that have become an annual problem. The effectiveness of many of these credits has been questioned by studies from the Iowa Department of Revenue, by academic research, and by the Iowa Tax Credit Review Panel of 2010.[1]

170411-biz_creditsReining in the credits going to businesses will not be easy. A bill was recently introduced (HSB187) to end the refundability of these credits — provisions that allow companies to receive a check from the state whenever the credit exceeds their total state income tax. The business lobby was out in full force to defend their perks.

These income tax credits total over $285 million this year.[2] More tax credits — $125 million for both this year and next — are part of the massive commercial property tax cuts of 2013. (In various ways, the 2013 cuts now cost the state treasury another $300 million annually.[3]) Just a portion of these breaks would go a long way to solving the state’s perennial budget problem. The graph at right shows existing business income tax credits and new property tax credits together cost the state twice as much as the credits cost in 2013, leaving less to spend on critical public services.

However, there is a real danger that any savings from capping or reducing business tax credits would not be directed at improving education, reducing student debt, cleaning our water, or restoring cuts to public safety and the courts. Instead, some legislators apparently would rather spend it on a made-up problem — that Iowa’s taxes are supposedly driving corporations and individuals out of the state. This is a faulty notion for three reasons.

170325-statetaxesFirst, Iowa taxes are consistently found to be average among the 50 states, or below average. There have been several recent studies of Iowa’s business taxes by accounting firms. One found that Iowa state and local taxes falling on business are about average; three others found Iowa taxes to be below average (depending on the type of business) — including one report that ranked Iowa business taxes the fourth lowest in the country.[4] State and local taxes overall represent about 5.9 percent of personal income in Iowa, just under the U.S. average of 6.0 percent.[5]

Second, taxes have little or nothing to do with people’s decisions to move from one state to another. ALEC (the American Legislative Exchange Council), AFP (the Koch-funded Americans for Prosperity), and other right-wing groups continue to push the notion that taxes drive migration patterns in an effort to validate their tax cutting approach to state economic policy. But this assertion is contradicted by research on the issue.

Over their lifetimes, the majority of Americans do not move far, with most remaining in the state they grew up in or moving to a neighboring state. Those who move farther away do so for many reasons: job availability, climate, marriage, proximity to family, housing costs, the quality of schools, and other factors, according to years of research on this issue. This research consistently finds that taxes have a negligible effect on people’s decisions to move.[6]

170411-box-migration

Finally, decades of research have shown that state and local taxes on business are too small to have a significant effect on business investment and location decisions. All state and local taxes on businesses combined represent only about 1.8 percent of total business costs on average for all states.[7]

Businesses weigh most heavily the basics that comprise the other 98 percent of their cost structure: proximity to markets and to suppliers; transportation infrastructure; supply of labor with appropriate education and skills; wage and salary rates; energy costs; occupancy costs (to buy or lease space); access to supporting business services; the quality of local schools, recreation amenities, climate and other amenities important in attracting and retaining skilled labor; and proximity to university research facilities.

Instead of relying on credible academic research, or the reports by accounting firms that show business taxes are below average in Iowa, proponents of business tax cuts cite Iowa’s supposedly low “business tax climate” ranking by the Tax Foundation.  Yet this ranking has been thoroughly discredited.[8]

The drumbeat from the right has been the same for years — we need to lower Iowa’s taxes because they are making us uncompetitive; tax cuts will drive economic growth and prosperity. It is astounding that this argument is still being made after the fiasco in Kansas. Those same national groups pushing for regressive tax changes in Iowa (ALEC, AFP) convinced the Kansas governor and legislature in 2012 that individual and business tax cuts would act like a shot of adrenaline to the state economy. Instead, tax cuts have left Kansas mired in drastic budget shortfalls, credit downgrades, and school cutbacks.[9] And the predicted economic miracle turned out to be a disaster: the state changed from above average to below average growth after the tax cuts went into effect.[10]

We should hope for real tax reform, the kind that eliminates wasteful spending on tax breaks that provide little or no economic benefit, and that ensures a stable revenue stream to fund education and other public services important to ordinary Iowans. We should resist the use of bogus “research” to justify further tax breaks for those who need it least.


2010-PFw5464Peter Fisher is Research Director for the Iowa Policy Project. He holds a Ph.D. in economics from the University of Wisconsin-Madison and is professor emeritus of Urban and Regional Planning at the University of Iowa. A national expert on public finance, Fisher is frequently quoted in the Iowa and national media on issues involving tax policy and economic development strategies. Following publication of two published critiques of various state business climate rankings, Fisher has produced a website to track issues with such rankings and better perspective on state policies to promote growth, Grading the States, at www.gradingstates.org.


[1] The Department of Revenue’s evaluation studies can be found here. Reviews of academic research include those by this author on his website Grading the States, and by Wiliam Gale, Aaron Krupkin, and Kim Rueben. “The Relationship between Taxes and Growth at the State Level: New Evidence.” National Tax Journal, vol. 68, no. 4, December 2015, pp. 919-941. The Iowa Tax Credit Review Panel report can be found here.

[3] This includes $152 million estimated for FY 2017 for the Commercial and Industrial Property Tax Replacement; $125 million for the Business Property Tax Credit; and an additional $25 million in state School Foundation Aid necessitated by the reduced assessment of commercial and industrial property. See Summary of FY 2018 and FY2019 Budget and Governor’s Recommendations, LSA – Fiscal Services, January 12, 2017, p. 218; Summary of FY 2017 Budget and Governor’s Recommendations, LSA – Fiscal Services, January 14, 2016, p. 63.

[4] Ernst and Young, LLP and the Council on State Taxation, Total State and Local Business Taxes: State-By-State Estimates for Fiscal Year 2015, December 2016 . Anderson Economic Group, 2016 State Business Tax Burden Rankings, 7th Edition, May 2016. KPMG and the Tax Foundation, Location Matters: The State Tax Costs of Doing Business, 2015. Ernst and Young, LLP and the Council on State Taxation, Competitiveness of State and Local Business Taxes on New Investment, April 2011.

[6] See Taxes Have Little to do with People’s Decisions to Move to or From a State. On this author’s website, Grading the States.

[7] See State and Local Business Taxes are Not Significant Determinants of Growth. On this author’s website, Grading the States.

[8] See The Tax Foundation’s State Business Tax Climate Index. On this author’s website, Grading the States.

[9] See numerous blog posts from the Kansas Center for Economic Growth.

[10] See The Lessons of Kansas. On this author’s website, Grading the States.