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What taxes might work to cover health care reform

Two weeks ago, 91-year-old Stan Niemiec of Largo got out his patriotic stationery — it has an eagle on one side of the letterhead and an American flag on the other — and penned a letter to President Barack Obama.

"Subject: Health Care,'' the World War II vet wrote. "As a citizen I would be willing to pay 2 or 3 cents tax more on a gallon of gas. Question: How much would a 3-cent tax on a gallon of gas nationally bring?''

Niemiec sent me a copy of his letter because I had just done a story on Canada's universal health care system. Judging from reaction to the story, quite a few people like Niemiec would gladly pay more in sales or gas taxes to provide coverage for the 46 million uninsured Americans.

And as the reaction also showed, quite a few people think raising taxes of any kind is a terrible idea. They deride the Canadian system, contending it is made possible only by a crippling level of taxation.

As Congress wrestles with health care reform, how to pay for it is the biggest dilemma. Proposals to tax the wealthiest Americans have met with predictable outrage from the rich.

Would it be fairer to boost gas or sales taxes, which are paid by a broad swath of the populace, including those of lower income who presumably would benefit the most from health care reform? How much would you have to raise those taxes to cover all of the uninsured? And is Canada's tax "burden'' really as burdensome as critics say, considering what Canadians get in return?

To answer Niemiec's questions — and mine — I checked with experts and got some surprising answers.

Gas tax won't work

First of all, forget the gas tax.

The cost of covering all uninsured Americans for 10 years is now estimated at $900 billion, or $90 billion a year. Each penny of the federal gas tax raises $2.14 billion annually. To raise $90 billion, the gas tax would have to increase by 42 cents a gallon — not 2 or 3 cents.

That would still leave our gas taxes lower than in Canada and most other developed countries. But there's another stickler — the gas tax by law can be used only for highways and surface transportation. It would take an act of Congress to steer money from asphalt to angioplasties, hardly likely at a time when the highway system may be in even worse shape than the health care system.

"It's not a realistic option,'' says Tony Dorsey, spokesman for the American Association of State Highway and Transportation Officials. "This is a dedicated source of revenue just for transportation.''

A variation on the sales tax

Which brings us to the sales tax.

Canadian health care is funded in part by federal and provincial sales taxes, which are much higher than in the United States. Ontario residents pay a total of 13 percent compared to 7 percent in Tampa, though groceries, children's clothing and some other items are exempt.

"Certainly when the federal sales tax came into place in 1991 there was a large outcry,'' says Don Carson, associate partner in the Toronto office of accounting firm Price Waterhouse Coopers. "But it's the kind of thing people have gotten used to.''

In the United States, some experts seeking an alternative to our Byzantine tax structure favor a national sales tax or the similar Value Added Tax (VAT), common in Europe.

"I think it's a great idea,'' says Leonard Burman, director of the nonpartisan Tax Policy Center in Washington, D.C. "If we can't raise the income tax to pay for health care, then we should do what every other country in the world is doing, which is enact a VAT. It's pretty easy to collect and easy to administer.''

Burman says the new tax could pay for health insurance vouchers that would be issued to working-age Americans and all those now on Medicare and Medicaid. The VAT would be combined with a vastly simplified tax code so that most taxpayers would not have to file income tax returns.

The VAT "could be as high as 25 percent,'' Burman says, "but that's not high by European standards and you could really cut the income tax rate a lot.''

The voucher plan would also overcome the major rap against sales and value-added taxes — that they hit the poor the hardest because they spend more of their income on taxable items.

"The health care voucher would offset the inherent regressivity,'' Burman says, "because the voucher would be worth more than the VAT tax paid by most households.''

Another potential plus: Before the tax took effect, Americans might rush out to buy flat-screen TVs and other big-ticket items. "It's the only new tax that could actually contribute to stimulating the economy,'' Burman says.

Income taxes aren't much lower

We Floridians are lucky to live in one of the few states that doesn't levy a state income tax (if by lucky you mean being so short of money that we're cutting jobs and services).

But many Americans might be surprised to learn that their income taxes are not that much lower than those in Canada, where everyone has health insurance.

For a Canadian family of four earning less than $30,000, "you'll receive tax assistance from the federal and/or provincial governments that will exceed your income tax liability,'' says Carson, the Toronto tax expert. "You won't pay tax — you'll be getting money from the government.''

At the other end of the scale, there's not a huge difference in taxes for the richest Americans and Canadians. A top income earner in Ontario pays about 46 percent in combined federal and provincial income taxes. The same person would pay more than 40 percent in New York, California and 28 other states.

To help fund his health care plan, Obama proposes returning our top federal rate to 39.6 percent. "If that happens,'' Carson says, "you'll see some of the rates for high-tax states to be greater than in some parts of Canada.''

Where the United States holds the clear advantage is with families earning between $100,000 and $400,000.

"That's because the top U.S. federal rates don't really kick in until you're close to $400,000,'' Carson says. "It's going to be the middle or upper-middle class U.S. taxpayer who's able to itemize deductions and claim relief for home mortgage interest, which we don't have in Canada.''

Canadians, though, don't have to pay estate taxes. And they get a tax credit for social security payments, unlike American workers whose 7.65 percent FICA tax on employment income is not deductible.

Real reform is really hard

As my July 19 story pointed out, Canada's health care system is far from perfect. There can be long waits for nonemergency care. There are shortages of doctors and diagnostic equipment.

But Canadians are proud to have had universal coverage for decades without running up huge deficits. So overextended did the U.S. government and millions of Americans become in the first part of this century that Obama and congressional leaders agree that any health care reform must be "deficit neutral.'' That's a realistic approach, but it also makes real reform that much harder.

"Our federal debt level is significantly lower than in the U.S., partly because Canadians didn't go on the big sort of bender the U.S. went on,'' Carson says. "A lot of Canadian tax rates were higher but we were paying down our debt and trying to reduce the burden on future generations.''

As for Stan Niemiec, he was disappointed that his gas tax idea didn't pan out. But I imagine that if he were in Congress, he'd find some way to make sure every American had good access to health care.

Susan Taylor Martin can be contacted at

What taxes might work to cover health care reform 08/03/09 [Last modified: Monday, August 3, 2009 10:14am]
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