All Vermonters should share the risks of health care reform
By Paul A. Cillo, Vt Digger, April 19, 2011
Governor Shumlin is right. Health care reform is needed—the sooner the better. One big reason: Health care is busting the state budget.
But proposed reforms are not likely to produce real budget savings until 2015 at the earliest. And health care costs will continue to balloon until these reforms are in place. What happens to state budgets in the meantime? Which Vermonters bear the burden now? And who bears the risk if the needed reforms fail to materialize?
So far, low- and middle-income Vermonters have disproportionately carried the load. Going forward, this is neither fair nor fiscally wise.
Vermont health care costs have increased nearly 9 percent a year on average for the last 10 years—twice the rate of the state’s economic growth—according to data from the Department of Banking, Insurance, and Health Care Administration (BISHCA).
Just as health care is eating up a larger share of the economy each year, it is also demanding a larger share of the state budget—now more than 30 percent. Unwilling to make the case for increased taxes, lawmakers have covered this increase by forcing down spending on everything else—the courts, education, child welfare, services for the elderly, and other services essential to our civilized society. Most of these spending cuts are in human services, the largest area of the state budget, which affect low- and middle-income Vermonters most.
Meanwhile, those in the upper income brackets are largely immune from the budget impacts of rising health care costs. These Vermonters tend to be untouched by cuts to human services. Their health insurance premiums typically take a smaller percentage of their larger incomes. And health care tax breaks benefit those with higher incomes more than those of lower earners.
Until the economy recovers and health care cost growth is slowed to a sustainable level, Montpelier needs to find a way to cover both the rapidly increasing costs of health care and the ongoing costs of public services that Vermonters need.
Rather than impose additional cuts on top of already steep budget reductions, lawmakers should raise sufficient revenue. The best way to do so would be to levy a temporary tax on Vermonters with the highest incomes. Here are three reasons such a tax would be both economically sensible and fair. Such a tax would provide:
1. A much needed stimulus effect on the state’s recovery. Budget cuts and tax increases can dampen economic activity by reducing the amount that might otherwise be spent on goods and services. However, economists point out that state spending funded by tax increases on upper income households, who have enough money to be able to save, can have a stimulus effect because it puts money into the economy that otherwise would go into savings.
2. Relief from federal cuts affecting Vermont. Thanks to the extension of the Bush tax cuts, the top 5 percent of Vermonters are receiving a federal tax reduction windfall of $190 million each year in 2011 and 2012. At the same time the federal government is reducing aid to Vermont—leaving the state to pick up costs previously paid with federal dollars. Taking back some of this tax-cut revenue can keep state services intact.
3. A stake in health care reform for all Vermonters. A temporary tax on upper-income Vermonters to help pay for the budget impacts of rising health care costs gives these Vermonters a solid reason to help the governor get those cost increases under control.
The governor’s leadership on health care reform is laudable. And the legislature should enact his reforms this year. But until the cost-saving benefits are real, all Vermonters—not just those with low and middle incomes—should share the risks and pitch in to cover the state budget consequences of rapidly rising health care costs.
Paul Cillo is president of the Public Assets Institute (www.publicassets.org), a non-partisan, nonprofit fiscal policy think tank based in Montpelier. You can find this report on their website.
