Category Archives: Tax Policy

Trump 2.0: Day 113

Politics, Tax Policy

The day’s big news came in the early morning, when the U.S. and China announced a 90-day temporary reduction in tariff levels while the two countries continue to negotiate. U.S. tariffs on Chinese imports go from 145% to 30%, while the retaliatory Chinese tariffs on U.S. exports go from 125% to 10%. Paul Krugman’s article about the situation this morning was titled “When an arsonist poses as a firefighter,” which seems about right. The stock market loved the news, but the overall uncertainty and incoherence associated with Trump’s tariff policy remains.

Trump’s teased executive order on prescription drug pricing turned out to be something of a nothingburger. He’s giving pharmaceutical manufacturers 30 days to voluntarily reduce drug prices to most-favored-nation levels, or else… HHS will embark upon a rulemaking plan to impose it, somehow? And this from the party that vigorously opposed giving the federal government any role in negotiating drug prices for Medicare with manufacturers, and that two years ago opposed a nationwide price cap on a century-old drug whose discoverers had sold the patent for a symbolic $1. Fuhgeddabouddit. This does not strike me as a serious policy initiative.

Today the House Republicans released the first draft of their tax bill. At this point the bill does not propose a 39.6% marginal bracket for millionaires, but instead retains the 2025 tax brackets with inflation adjustments, leaving the top marginal rate at 37%. Some relief is given on the SALT deduction limitation, but only up to $30,000 instead of the current $10,000, and the incremental deduction phases out over the $400K-$500K income range; this is unlikely to satisfy the New York and California Republican delegations. The bill also proposes a new type of tax-preferenced savings vehicle called a MAGA (which stands for “money account for growth and advancement”), although the accounts can only be funded with respect to individuals age 8 or less. Trump’s previous tax bill had introduced a 1.4% net investment income tax on those university endowments whose value exceeds $500K per student; continuing Trump’s war on Harvard and other elite institutions, the House bill turbocharges that tax, with the rate going up to 21% on endowments whose value exceeds $2 million per student. Of course this bill will inevitably take many twists and turns in the weeks and months ahead, but after three-and-a-half months we finally have a stake in the ground on a key part of Congress’ top legislative priority.

Finally, I had commented recently about Trump having just fired the Librarian of Congress. The next day he fired the Registrar of Copyrights, who heads the U.S. Copyright Office and reports to the Librarian of Congress. Coincidentally, the U.S. Copyright Office had just published a report called “Copyright and Artificial Intelligence, Part 3: Generative AI Training,” an area that is certainly of keen interest to Elon Musk, who two years ago had started an artificial intelligence firm called xAI that is reportedly in the process of raising funding at a valuation of $120 billion.

Trump 2.0: Day 109

Politics, Tax Policy

The big news of the day was white smoke over the Vatican, in only the second day of the conclave called in the wake of the death of Pope Francis. The new pope, now styled Leo XIV, is a 69-year-old Chicagoan who majored in mathematics before joining the Augustine order, and who spent most of his pastoral career in Peru. He becomes the first American-born pope.

Today is the 80th anniversary of what we used to call V-E Day, until earlier this month when Trump announced it would be renamed “Victory in World War II Day,” in parallel to “Victory in World War I Day” which is his new name for November 11th. The good news from the Vatican stepped on what the White House had hoped would be the day’s big news story, the announcement from the Oval Office of the framework of a trade deal between the U.S. and the U.K. It feels like pretty weak sauce to many observers, more like a public relations stunt than something truly substantive, although it did cause Aston Martin stock to go up 14% after British cars were granted an exemption from the recently-imposed 25% tariff on foreign autos.

Yesterday Senator Tillis (R-NC), a member of the Judiciary Committee, had said he would not support Trump’s nomination of Ed Martin to be the U.S. Attorney for the District of Columbia. Martin, who has been serving in that role in an acting capacity, has been controversial due to his previous advocacy of Jan 6th defendants and his lack of any prosecutorial experience. Today Trump pulled Martin’s nomination, and while I was writing this post he announced that he will instead nominate Jeannine Pirro, a Fox News host with experience in New York State as both a judge and prosecutor, and the unsuccessful Republican candidate for New York AG in 2008 against future governor Andrew Cuomo.

Finally, there is reporting today that Trump is pushing for a new top marginal federal tax rate of 39.6% for incomes over $2.5 million for single filers and $5 million for joint filers. Of course, 39.6% had been the top marginal tax rate from 1993-2000, and again from 2013-2017. However in 2017 the 39.6% rate applied to incomes over $470,700 for joint filers; that top rate was reduced to 37%, under the TCJA provisions that are due to expire post-2025. Still, the idea of a Republican president being willing to propose an increase in the top marginal tax rate is yet another sign of how odd our politics have become.

Election 2024: Day -83

Politics, Tax Policy

Today there are non-Presidential primary elections in four states, including Minnesota; I hadn’t appreciated back on Super Tuesday that the primary election I’d forgotten about was for the Presidential ticket only. As such, earlier today I voted in a Minnesota federal race for the first time. Not that it was particularly exciting: the only two races on the Democratic ballot were Senator Klobuchar against some no-name challengers, and Representative Craig against one no-name challenger. Still, civic duty and all.

We’re now 6 days away from the start of the DNC, in Chicago. One of the many odd things about the 2024 Presidential election is how policy-free it has been, at least so far; perhaps that will start to change with the DNC coming up. Harris has had a very successful three-week campaign, but that success has generally been all about “vibes”, replacing a politics of fear with a forward-looking politics of joy. It would be nice to understand, for instance, how she feels about tax policy, with many of the provisions of the Trump-era TCJA set to sunset after 2025.

The one piece of tax policy we got out of Harris last week, to my chagrin, was her endorsement of an idea that Trump floated back in June to make tips for service and hospitality workers exempt from taxable income. While I appreciate the appeal of this idea in the key swing state of Nevada, as a general rule I think it’s poor policy to try and grant differentiated tax status to different types of income, as it opens the door to gamesmanship. Having said that, I have more confidence in the Democrats’ ability to implement this idea in a reasonable manner than I do the Republicans.

Both candidates have agreed that the September 10th Presidential debate on ABC is once again on, after Trump had previously said he wouldn’t show up. Trump is advocating for additional debates, to which Harris has been non-committal so far.

There was a surprising development last week in U.S. v. Trump (D.C. edition), where Special Counsel Smith asked for a 3-week extension in responding to Judge Chutkan’s request for a proposal on how to proceed with the case in the wake of the SCOTUS decision in Trump v. U.S. It is not entirely clear what the delay may mean. Some have wondered if perhaps, now that a pre-election trial is off the table, Smith might reverse course and file a superseding indictment that now includes the six unindicted co-conspirators mentioned in the original indictment. Alternatively, Smith is likely consulting more broadly within the DOJ about an appropriate course of action that reflects not just the interests of this case but also the institutional interests of the DOJ with respect to future disputes over presidential immunity. We should learn what Smith has in mind on August 30th, shortly after we should have seen his appeal to the 11th Circuit in U.S. v. Trump (Florida edition).

Finally, in keeping with his lifelong pattern of using lawsuits for both publicity and nuisance purposes, Trump indicated this week that he will be suing the DOJ and FBI for $115 million in damages related to the Mar-a-Lago documents case searches and prosecution.

Kansas Proposal to Increase HMO Tax: Unsound Policy?

Health Insurance, Tax Policy

Today I read an article in a national outlet about proposed legislation in Kansas that touches on a number of themes I’ve dealt with in my professional career.  (Full disclosure:  Until recently I worked for a major insurer that is identified in the article as leading the lobbying effort against this legislation; however, I had zero involvement in that lobbying effort and in fact was completely unaware of this issue until reading about it today.)

My understanding of the situation, based largely on reporting from the Wichita Eagle, is this:

  1. It is well known that Gov. Brownback has been pursuing an aggressive tax reduction campaign in Kansas.  As part of this, he is looking to find a new revenue source to replace about $80 million of general state tax revenues that are devoted to support Kansas’ Medicaid program.
  2. His proposal involves increasing a particular Kansas tax that applies only to HMOs (and not to other health insurers) and that has a peculiar name:  the privilege fee.  This tax is currently defined as 1.0% of annual premiums, but under the legislation it would increase to 5.5% of annual premiums.
  3. Three of the HMOs to which the tax increase would apply are contractors under the Kansas Medicaid program, KanCare.  If I understand correctly, the privilege fee applies to all premiums written by HMOs, including both KanCare and non-KanCare premiums.

This proposal strikes me as suboptimal public policy, for a number of reasons:

The tax increase on HMOs will ultimately get passed through to other parties, so what exactly is the point?  Look, it’s potentially very appealing for a politician to be able to say, I’m reducing the general tax burden, and in exchange I’m increasing taxes paid by a special interest group – particularly when the group in question is one of the few industries that is almost as unpopular as Congress.

But, it’s not a particularly intellectually honest position.  The privilege fee paid by Kansas HMOs is one part of their cost of doing business; and it is rational to expect that those HMOs will ultimately adjust their pricing – that is, the insurance premiums they charge – to reflect any increase that legislators enact in that aspect of their costs.

So, at the end of the day, this tax increase will be borne broadly:  by individuals who purchase insurance policies directly from HMOs; by employers who purchase insurance from HMOs for their employees; by the employees of those employers, to the extent that the employers react to the premium increases by ratcheting up the portion of healthcare benefits that they ask the employees to fund themselves; and by the consumers of those employers’ products, to the extent that employers react to the premium increases by increasing the prices they charge for their goods and services.  I think it will also be borne by one other party, which makes this even odder…

Won’t KanCare end up having to pay for part of this tax increase?   As far as I can tell, the 5.5% privilege fee will apply to all the premiums that Kansas HMOs write, including those for KanCare business.  But what the HMO contractor calls revenue, the state Medicaid program calls an expenditure.

So, to the extent the HMOs need to increase the premiums they charge KanCare in order to cover the privilege fee increase, doesn’t that automatically lead to increased Kansas Medicaid expenditures?  A recently-adopted Actuarial Standard of Practice reiterates that, in order to be actuarially sound, the rates that Medicaid agencies pay to HMOs need to take into account any taxes or fees that the HMOs need to pay out of the revenues they receive.

Thus, we have some dollar-trading here:  The HMOs that participate in KanCare will pay higher privilege fees, but then they’ll receive correspondingly higher revenues from KanCare.  This doesn’t strike me as a model of efficiency.

Having said that:  I’m not a Medicaid expert, but the fact that Medicaid is a joint state/federal program may mean that it’s not purely dollar-trading viewed from the standpoint of the state of Kansas.   If Kansas collects an additional dollar in privilege fees from a KanCare contractor, and then as a result that contractor needs an additional dollar in revenues from KanCare, does the federal government end up subsidizing some portion of that new dollar in revenues?

Differential tax rates on market participants can create market distortions.   The privilege fee we’re discussing applies only to HMOs, who pay this fee but in exchange are exempt from the Kansas premium tax paid by all other insurers.

In my view, this is an accident of history.  While there are exceptions, today most HMOs operate in a manner very similar to most other health insurers, in that the underlying healthcare services are provided not by the HMO’s own employees but by an unaffiliated network of providers; the main difference today is that, typically, an HMO network will be narrower than a non-HMO network.  This convergence of business models over the past couple of decades calls into question historical practices in some states that treat HMOs differently from other health insurers.

In the Kansas case, today HMOs enjoy a modest competitive advantage relative to other health insurers:  HMOs pay a privilege fee of 1.0% of premiums, whereas other health insurers instead need to pay premium taxes equal to 2.0% of premiums.  The proposed legislation would turn this around, and give non-HMOs a very significant competitive advantage.

This in turn can be expected to have ramifications on choice in the broader health insurance market in Kansas.  It’s a fair generalization that HMO products tend to be cheaper than non-HMO products, to the extent that HMO products generate cost savings via the usage of narrower provider networks.  By placing HMOs as a tax disadvantage to non-HMOs, the inherent cost advantage of those HMO products will shrink, which arguably will make consumers worse off.  (This is the argument being advanced by Aetna, according to the Wichita Eagle article.)

The tax increase will, in a sense, be retroactive.  I argued above that, ultimately, HMOs will react to this tax increase by passing it through to their customers via increased premiums.  And while that may be true in the long run, it would likely be far less true in the immediate term.

The statute calls for the increased privilege fee to apply to all premiums written by HMOs in calendar year 2015.  The problem is that insurers in general (including HMOs) price their products well in advance of when the premiums take effect, and then by regulation hold each customer’s premiums steady for an agreed policy term (typically 12 months for health insurance, as opposed to 6 months for auto insurance).  So, presumably all the HMOs in Kansas had priced their 2015 premiums under the assumption that the privilege fee would remain at 1.0%, and cannot go back and change those premiums if the statute is enacted.

Thus, from the HMO’s standpoint, this proposal represents a material change in the rules in the middle of the game.  An unanticipated expense in 2015 equal to 4.5% of premiums (the new rate of 5.5%, less the existing rate of 1.0% already reflected in pricing) could absorb most or even all of an HMO’s expected profits for the year, health insurance being a relatively low-margin business.  Regardless of how one may feel about the HMO industry, there’s something untoward about a mid-year tax change that can be expected to have such a dramatic impact on the short-term financial prospects of an industry, given that by regulation the industry cannot take immediately effective action to react to the changed circumstances.