Off the Charts Blog | Center on Budget and Policy Priorities

The Congressional Budget Office’s (CBO) latest Medicare estimates show that opponents of health reform were wrong:  phasing down overpayments to the insurance companies that serve some Medicare beneficiaries through the Medicare Advantage program won’t gut the program or lead insurers to drop out.  Instead, CBO expects Medicare Advantage to keep growing.

Before health reform (in 2009), Medicare paid Medicare Advantage plans 14 percent more per beneficiary than it would cost to cover these people in regular Medicare, according to the Medicare Payment Advisory Commission (MedPAC).  These overpayments drove up premiums for people in regular Medicare and weakened Medicare’s finances.

Health reform began shrinking the overpayments last year.  Eventually it will bring Medicare Advantage payments more in line with the cost of regular Medicare.  (Even if policymakers went further and required that Medicare Advantage plans receive no more than what regular Medicare costs, the plans would still be overpaid.  That’s because they enroll healthier-than-average — hence lower-cost — beneficiaries and Medicare’s “risk adjustment” mechanism can’t fully account for these differences in determining plans’ payment rates.)

Opponents of health reform claimed that cutting the overpayments would harm millions of beneficiaries and devastate Medicare Advantage.  Insurers use the overpayments to provide some benefits that regular Medicare doesn’t offer, they argued, so insurers would have no choice but to institute deep benefit cuts.  They might even withdraw from the program.

But, while part of the overpayments pay for extra benefits, insurers keep a substantial part as profit and to cover overhead.  For example, as we wrote in 2009, MedPAC found that Medicare paid Medicare Advantage plans an average of $1.30 for every $1 in additional benefits they delivered.

If insurers become more efficient, they can still provide some extra benefits and offer other inducements to enroll, despite the cuts in excessive payments.  (In fact, Medicare originally allowed insurers to provide additional benefits only if they covered Medicare beneficiaries at less cost than regular Medicare.)

CBO projects that Medicare Advantage plans will continue to thrive.  It expects enrollment in Medicare Advantage (plus some other, much smaller plans that predated Medicare Advantage) to grow from 13 million last year to 18 million by 2019, even with health reform.  That’s hardly a sign of the program’s impending collapse.

U.S. corporations have lobbied aggressively in recent years for both a temporary tax holiday under which they would bring their foreign profits back to the United States and pay a much lower tax on them, as well as a permanent exemption of foreign profits from U.S. taxes (known as a “territorial” system).  This week’s headlines about Apple’s reported use of offshore subsidiaries to lessen its U.S. tax bill have renewed the debate over these flawed ideas.

Multinational companies like Apple currently have a strong incentive to defer U.S. corporate taxes by shifting and keeping profits overseas (see chart).  As we’ve explained, a territorial system would create greater incentives for those companies to invest and book profits overseas rather than at home — and that, in turn, risks reducing wages at home by encouraging investment to flow overseas, increasing budget deficits by draining revenues from the corporate income tax, or raising taxes on smaller companies and domestic businesses to offset the revenue loss.

Now, policymakers have begun to focus on the issue.  The Senate Permanent Subcommittee on Investigations has issued a report that highlights the tax planning gymnastics that companies undertake to shift profits to overseas tax havens in order to avoid U.S. taxes.

Armed with more information about how these incentives are creating unfair advantages for multinationals and draining much-needed tax revenue, the President and Congress should resist the lobbying campaign and instead focus on reducing the incentive to shift profits and operations overseas.

In today’s Senate debate on the farm bill, Senator David Vitter offered — and Senate Democrats accepted — an amendment that would increase hardship and will likely have strongly racially discriminatory effects.

The amendment would bar from SNAP (food stamps), for life, anyone who was ever convicted of one of a specified list of violent crimes at any time — even if they committed the crime decades ago in their youth and have served their sentence, paid their debt to society, and been a good citizen ever since.  In addition, the amendment would mean lower SNAP benefits for their children and other family members.

So, a young man who was convicted of a single crime at age 19 who then reforms and is now elderly, poor, and raising grandchildren would be thrown off SNAP, and his grandchildren’s benefits would be cut.

Given incarceration patterns in the United States, the amendment would have a skewed racial impact.  Poor elderly African Americans convicted of a single crime decades ago by segregated Southern juries would be among those hit.

The amendment essentially says that rehabilitation doesn’t matter and violates basic norms of criminal justice.

It’s also possible that the amendment could contribute to recidivism.  Ex-offenders often have difficulty finding jobs that pay decent wages.  The amendment could pose dilemmas for ex-offenders who are trying to go straight but can neither find jobs nor, as a result of the amendment, obtain enough food to feed their children and families.

Senator Vitter hawked his amendment as one to prevent murderers and rapists from getting food stamps.  Democrats accepted it without trying to modify it to address its most ill-considered aspects.

The farm bill is still on the floor, and the amendment can still be modified.  Senators should gather the courage to step up to the plate and address this matter forthwith.

Some charities and state and local governments have raised concerns about the President’s proposal to cap, at 28 cents on the dollar, the tax subsidy that affluent Americans receive for tax deductions and some other tax expenditures.  Charities worry that charitable donations would drop substantially (although the Tax Policy Center estimates that the decline would be modest); while states and localities worry they would have to pay higher interest rates on their bonds in order to attract investors.  Several important facts are often missing, however, from the discussion of these issues.

• At 28 percent, the top subsidy rate would be the same as during the Reagan years. Some critics of the Obama proposal have noted that under President Reagan, the top marginal tax rate and the top subsidy rate for deductions were both 28 percent, whereas the Obama proposal would create a gap between the top marginal tax rate (39.6 percent) and the top subsidy rate (28 percent).  That’s true but has no bearing on the issue at hand — namely, the effect on charitable giving.  The subsidy rate is what matters here, because it determines filers’ financial incentive to engage in a subsidized activity such as giving to charity or buying municipal bonds.

• The House-passed Ryan budget and House Ways and Means Chairman Dave Camp’s tax-reform process aim to cut the tax subsidy rate below the Obama level. The Ryan budget and Chairman Camp have set a goal of cutting the top marginal rate to 25 percent.  That would put the top subsidy rate for charitable donations and municipal bond interest three percentage points below the Obama cap.

  Most charities and organizations that have criticized the Obama 28 percent limit have been silent about the Ryan and Camp proposals (in many cases, they also were silent during the Reagan and George H.W. Bush years, when the top marginal tax rate was 28 percent).  Some may mistakenly assume that what counts is the difference between the marginal rate and the subsidy rate — when, in fact, it is the subsidy rate that matters.

• The Obama budget would use the resulting savings primarily to replace the sequestration budget cuts, thereby helping both charities and states and localities. Sequestration is scheduled to impose even deeper cuts next year and to remain in effect through 2021.  Its harsh cuts in a range of programs — including those that alleviate poverty or combat disease at home or abroad as well as programs in education, environmental protection, health research, the arts, and many other areas — will place heavy added burdens on both charities and state and local governments.

  Many nonprofits receive grants or contracts to provide services that are funded in part or in whole through federal programs, especially non-defense discretionary programs that operate through state or local governments.  Meanwhile, most federal grants that state and local governments receive to help them perform various functions come through programs subject to sequestration.

  In fact, sequestration will impose a double burden on nonprofits, raising the demand for their services while slicing their revenues.

  Thus, cancelling sequestration is of considerable importance to the charitable sector and to state and local governments.  While charities and state and local governments would lose some revenue from the proposed 28 percent limitation on tax deductions and exclusions, they would receive substantial revenue gains from repealing sequestration.

  By contrast, under the Ryan and Camp proposals, not only would charities and state and local governments suffer bigger losses from those plans’ reductions in tax subsidy rates, but none of the resulting revenue would go to ease sequestration or other budget cuts.

  Moreover, if all of the revenue from scaling back tax subsidies goes to lowering tax rates, as the Ryan budget and Chairman Camp propose, then further deficit reduction will likely come entirely from the spending side of the budget.  (In addition, it’s very unlikely Congress would be able to pass enough tax-expenditure savings to pay for lowering the top rate to 25 percent; if the resulting tax reform lost revenue, the ensuing budget cuts would likely be bigger still.)

  In short, additional cuts — on top of sequestration — in areas such as education, low-income programs, and state and local aid would almost certainly result from the Ryan-Camp approach, making the job of charities and state and local governments even more difficult.

Some critics of the Obama 28 percent limit say there are other ways to raise revenues for the purposes that the President has proposed.  But in most cases, they haven’t offered specific alternatives or they have suggested alternatives that, despite their merits, have little or no political viability in the current political environment.

The task remains of raising revenues to replace sequestration and to serve as part of a balanced long-term deficit reduction package, and the 28 percent limit remains the most promising proposal that is not significantly beyond the bounds of current political reality.

As states finalize their budgets for the next fiscal year, Minnesota stands out for making smart changes to its tax system that will position the state for future economic growth.  The legislature passed a tax plan last night that — after years of spending cuts — raises revenue to avoid more cuts and to make new investments that brighten the state’s economic future.  It also modernizes the state’s tax system so that it generates adequate revenue for a thriving state in a 21^st century economy.  Governor Mark Dayton supports the legislation and is expected to sign it.

The plan creates a new income tax bracket for the state’s richest households, repeals some tax breaks for companies operating outside the United States, raises revenues through changes to estate and gift taxes, and increases tobacco taxes.  It also helps modernize the state’s outdated sales tax system, including by taxing some digital goods and by requiring some online retailers to collect sales taxes on purchases by Minnesota residents.

The new revenue will prevent more than $600 million in cuts over the next two years to services such as schools, community colleges, natural resource protection, and programs that help seniors live independent lives.

The revenue also will enable the state to make substantial new investments in education.  For example, Minnesota will provide free full-day kindergarten in more public schools across the state, and it will substantially improve access to high-quality preschool for underprivileged children — an investment that research has proven boosts the incomes and productivity of children when they grow up.

Among other priorities, the plan also will allow the state to hold tuition steady in the state’s colleges and universities, and to increase financial aid for low- and middle-income families.  Over the last five years, Minnesota has cut funding for higher education by 30 percent, leading to substantial tuition hikes.

These investments in the state’s education system will pay off with stronger economic growth in the future by producing a better educated workforce with the kinds of skills and training that employers — especially high-wage employers — will need in the future.

The new revenue also will allow the state to reduce property taxes for many homeowners and many low- and moderate-income renters, who pay property taxes through their rent.  And, it will allow for more state aid to local governments, helping them further limit property taxes.  These substantial reductions in property taxes, combined with the income tax increase for wealthy residents, will make the state’s currently regressive state and local tax system fairer.

States that are still considering tax and spending changes — and how to boost their economies while supporting middle- and lower-income families — should look carefully at Minnesota’s plan.