On One Hand

July 24, 2009

Unions: Compromise on Benefits Tax Exemptions, Make Healthcare Reform Unstoppable

Filed under: Uncategorized — ononehand @ 1:39 pm
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I tend to roll my eyes when I hear Republicans use the term “special interest groups” to criticize opponents’ policy proposals. Everybody entity in society, be it a school, church, corporation or museum, and every person, rich or poor, young and old, looks out for his or her own interests – an idea that Republicans support. All political parties are coalitions of interest groups, and the purpose of an election is to determine whose interests are shared by a greater number of people and become priority. So for, say, Barack Obama to push a policy favorable to his constituents is exactly what he was elected to do, not a “special interest” push.

But I’ll step out on a bit more of a limb, politically, to say that the things most of us would consider “special interest” are conservative or Republican causes. The American Medical Association, for example – a lobbyist group of around a quarter of physicians supporting policies that make healthcare a more lucrative profession or to protect doctors from lawsuits – is a “special interest.” Oil companies are “special interests.” Wealthy taxpayers and their lobbies constitute a “special interest” group. Democrats campaign more on the common good, especially where it runs contrary to a powerful special interest group.

Labor unions, which Republicans are most often talking about when they use the “special interest” buzzword, are almost the opposite of special. They represent very broad and general interests, of workers – and the vast majority of people are some kind of worker even if they are not in a union. Unions support ideas that everybody working full-time should earn enough to be off welfare and be free of health and safety hazards in the workplace. Unions generally lobby for worker protections that extend beyond the reach of card-carrying members to all workers regardless of industry.

But when it comes to compromise on issues that could make healthcare reform happen, unions could do some good with a willingness to step out on a limb. It comes to a head when we talk about the possibility of taxing healthcare benefits – something that has a terrible ring to it – but could solve a lot of problems, but for the fact that it benefits union workers more often than non-union workers of similar income. Unions are in complete support of the idea of universal healthcare, but are oppose calling for a compromise that could make the endeavor more politically and practically feasible.

A tax exemption for employer-paid health insurance benefits sounds like a great idea, because having health insurance is a positive thing so we tend to believe it should go untaxed. What the exemption means is that you do not pay income tax on the portion of your income that is designated as the healthcare component of your benefits package; it is essentially an untaxed income. If you make $70 thousand dollars a year and an additional $5 thousand in health insurance for you and your family, your salary is essentially $75 thousand a year, but you don’t pay taxes on the last $5 thousand. It’s a sweet deal for employees, so employers who want to keep their workers happy participate in the system.

Unions also love the tax exemption. One of the main purposes of a labor union is to get its employees good benefits, so a very large number of union members have them. Union members tend to be on the middle to lower end of the income spectrum, so those benefits packages end up being a large percentage of their incomes. If you are a teacher making $28 thousand a year and receive $5 thousand in health benefits, that means that almost twenty percent of your salary is untaxed, which is a big help because basic healthcare costs the same for you as it does for a rich person but you have less income to pay it.

The ultimate reason the policy is sustainable is that more than half of Americans get health insurance either through their own workplaces or through the workplaces of someone in their families. Those who get benefits are also stable, employed Americans and are more likely to vote, and elected officials benefit from supporting policies that make their constituents happy.

But there are some conceptual problems with this kind of system, because it allows inequalities to materialize in the tax code. High-income people tend to get very expensive benefits packages, which turn into big chunks of untaxed income. If you are a middle or low-income person without benefits through work, you pay the full price of income tax on your earnings. If you choose to buy health insurance on your own you do so without the tax exemption on the portion of your income you’ll use to pay for your health insurance.

Economic conservatives and libertarians often side against the labor unions on this issue, and with taxing benefits. Its unusual for those camps to support what is essentially a tax increase, but they are groups who put a high priority on making the tax system consistent and also intensely resent the clout labor unions have in politics.

The biggest political opposition to an effective healthcare reform package – including a public option – is focused on the price tag of the reform proposals, which have been estimated to cost anywhere from billions to a trillion dollars over ten years. Reform proponents argue that inefficiencies that get wrung out of the system with reform ultimately save more money than they cost, but those savings are less certain than the plan’s known expenditures, and conservatives along with much of the public are reluctant to sign up for the deal when the federal budget is already so far in the red.

Much of the reform price tag could be paid off if the health benefits tax exemption is at least partially repealed. Making individual health insurance plans tax-deductible would be enough to equalize the ethical concerns with equality between benefits-paid workers and individual insurance purchasers, but that fails to solve the budget crisis that comes with healthcare reform. The funding supplied by taxing benefits is a juicy, tempting option, and justifiable because it would likely make healthcare better and save money for the very people who would have to pay up. But Barack Obama opposed taxing health benefits during his presidential campaign and that is partially due to his support of – and ongoing need for support from – labor unions.

Ironically, it is more in line with conservative philosophy for labor unions to do what is directly in the interest of their own members rather than wade into ideological ambitions of reforming the entire U.S. economy. In other words, a union organizer with a conservative mindset would care about keeping his workers’ health benefits untaxed rather than worry about widespread social implications on all workers. Libertarians expect the U.S. government to look out for American citizens first and to not go galavanting for democracy and freedom around the world, and they want the government to protect property rights and enforce contracts rather than try to make the society equal or reduce disparities of wealth. They want corporations to worry about their stockholders and do not think they are morally obligated to care for their employees – in other words, the philosophy holds that entities are responsible to a designated group of constituents and not responsible to anyone outside that group.

Yet in the real world it is when labor unions – coalitions of workers who bargain collectively against employers – seek to protect their own workers first that they get most criticism from political conservatives, who call them “special interest groups.”

I am not a conservative, and I see concern for everyone to be a virtue rather than a vice. And in this case, I think that unions may be making a mistake by taking a major bargaining chip off the table in the fight for healthcare reform.

I also worked full-time for a labor union last summer and fall, leading up to the 2008 election, doing grassroots political work by registering and talking to voters. The union was the SEIU, Service Employees International Union, the largest labor union on the country with an emphasis on healthcare workers and janitors. The union cared about its own workers, of course, but the ideology we discussed in the workplace was to promote policies that benefit all workers, not just SEIU employees, and universal healthcare was the main talking point. Individual members and some union organizers might have been involved for their own sake. But the office managers were young college graduates, often with advanced degrees, who were politically involved before they became union organizers and wanted to use their resources to benefit all workers who do what SEIU members did. The higher you went up in management, the more holistic the approach to workers’ rights was. We talked about racial equality, living wages and improving public education in struggling communities. Nothing I learned there would indicate that we weren’t concerned with non-SEIU members.

I would argue that union workers see a net benefit with a public health insurance option even if it means their health benefits are taxed as income. I also think they benefit from an expedient process that doesn’t hurt Barack Obama and Democrats with excessive hand-wringing. I’d also make the judgement call that a policy reversal from them – which is unlikely, but we’re working in the hypothetical here – would be a sufficient excuse for President Obama to sign a healthcare bill containing a change in the tax exemption (that, remember, he campaigned against) without looking like a flip-flopper, especially if he was not the one who wrote the legislation into the bill and signed it as a “compromise.”

This is one case where labor unions are a bit too much of a special interest group for my liking. Taxing healthcare benefits sounds awful, but remember that they are paying for a program that allows all people to pay less for health insurance if they have low incomes. The ultimate goal is to prevent people from going bankrupt when they get sick and to save lives, with the added benefit of reducing healthcare costs.

Here are a few ways to tax benefits while preventing some of the downsides that unions are worried about:

Tax health benefits as income, but at a consistent lower rate than regular income tax. This would leave in place the incentive for employers to purchase health insurance for their employees, but help solve the inequality problem and provide funding for a federal plan low-income people to access health insurance.

Tax health benefits only after a certain price, and on a progressive scale. If your benefits package is worth less than, say, $3 thousand a year, you pay zero taxes on that income. If your plan is more expensive, you pay zero taxes on the first $3 thousand, ten percent until it reaches $5 thousand, and twenty percent on anything after that. This seems to me to be the version labor unions are most likely to support – but a downside is that workers who would rather not have health insurance at all (an all-around bad idea, for everyone) would resent having to pay a tax on income they’d rather see in cash but then spend on more entertaining things.

Tax health benefits as regular income but give everyone who has health insurance a $2 thousand tax deduction to pay for part of it. This means that people who purchase their own health insurance see the exact same benefit as those who get their insurance through work; the government will essentially pay for the first $2 thousand of your benefit, and you pay everything after that. It also means that the tax burden is very light, or even non-existent, on those with small or average sized benefits packages. Of course health insurance costs more than $2 thousand a year so the system may need additional incentives to make it affordable for people who don’t get it through work – which is what the healthcare reform bill will be designed to do – and the tax break could get so expensive that it outprices the gain of taxing benefits in the first place.



  1. “But I’ll step out on a bit more of a limb, politically, to say that the things most of us would consider “special interest” are conservative or Republican causes.”

    Totally agree. And the term “special interest” is really pushed to the limit of meaning when we’re talking about unions, because the vast majority of people in any society are workers rather than owners.

    “The union cared about its own workers, of course, but the ideology we discussed in the workplace was to promote policies that benefit all workers, not just SEIU employees…”

    That’s good to hear. Ideally the work that unions do should benefit all workers, but I think that as long as capitalism remains in place workers’ interests could be relatively divided by differentials in the labor market. For instance, it is my understanding that skilled and professional workers are the most likely to be unionized, and they are relatively well-paid compared to the masses of non-unionized, unskilled labor (a lot of which is part-time). So when we’re looking at short-term interests, it is entirely possible for contradictions to emerge among the various groups of workers. Unionized, skilled workers might benefit in the short-term by not standing in solidarity with “illegal” immigrant labor, or unskilled labor, whereas in the long-term, internationalist workers’ solidarity is in the interest of all workers. So, it’s good that SEIU seems to be keeping its eyes on the big picture.

    Comment by monja_alferez — July 24, 2009 @ 10:54 pm | Reply

    • Well yeah, I mean – a lot of police unions endorsed John McCain for president. I’m certainly not 100% for all unions in all circumstances, and you could certainly say they disagree with other unions, since the SEIU dropped millions and millions of dollars in swing states in 2008 on behalf of Barack Obama.

      Comment by ononehand — July 30, 2009 @ 6:42 am | Reply

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