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Ruth Marcus

Obama'a tax pivot

WASHINGTON — One of the challenges for presidential candidates who reach the White House is finding a way to wiggle out of unaffordable or ill-advised campaign positions without attracting too much notice. President Obama managed to do this twice in his new budget: once explicitly, once by implication. Good for him, because both moves signal a better, more fiscally responsible approach.

The budget made a dramatic, smart, and little-noticed pivot from his campaign trail promise to cut taxes on 95 percent of Americans. Candidate Obama's original plan, which I criticized at the time as unduly expensive and poorly crafted, provided for tax credits of $500 per individual or $1,000 per couple. Couples making as much as $200,000 annually would qualify for a partial credit. The size of the credits was scaled back in the stimulus package, to $400 and $800.

But the big switch came when Obama released his budget last week. The "Making Work Pay" tax credits were there — but for the first time they were contingent on revenue from auctioning permits in the administration's proposed cap-and-trade program to alleviate climate change. In other words, no cap-and-trade, no tax credits.

This is extremely clever. A cap-and-trade regime is, in effect, a carbon tax, a penalty on pollution that would be passed along to everyday Americans. It makes sense to require polluting industries to pay for the impact of their activities, and to give them the incentive to move to less polluting approaches. At the same time, it makes sense to alleviate the costs that such a tax would impose on individuals.

In fact, it makes so much sense that this is what Obama envisioned during the campaign. Back then, he promised to devote some cap-and-trade revenue to investing in alternative energy, and save most of the rest "for rebates and other transition relief to ensure that families and communities are not adversely impacted by the transition to a new energy, low carbon economy."

So the tax credit that Obama now promises to finance with cap-and-trade revenue replaces a rebate that he already promised. Two proposed tax cuts have, in effect, been merged into one. An expensive tax credit is paid for with a valuable social program. Obama does not get dinged for abandoning an expensive and high-profile campaign promise, but he has quietly dropped a different one.

There was another potential pivot implicit in Obama's health care proposal. He identified $634 billion in revenue over 10 years to pay for the program, but acknowledged that this would only cover about half the cost of universal coverage. Lawmakers working on the issue would have to come up with the rest.

For the Willie Suttons of health policy, there's one obvious place to find that kind of money: the expensive, counterproductive, unfair and regressive special tax treatment for employer-provided health care. This benefit offered by employers is not counted as part of workers' taxable wages. This is expensive, costing about $200 billion a year. It is counterproductive because it encourages overconsumption of health care. It is unfair because those who must purchase insurance on their own generally do not receive special tax treatment. It is regressive because higher-income employees who are taxed at higher brackets receive a greater benefit from the exclusion.

On the other hand, there is a slight problem: When Republican nominee John McCain proposed to tax the value of employer-provided insurance, Obama blasted him for seeking a $3.6 trillion tax hike on American workers, "the largest middle-class tax increase in history." Hard to now turn around and endorse something similar. But watch that space.

Hence, the dog whistle of the Obama budget when it comes to paying for health care reform: You can't hear him saying "let's think about taxing employer-provided health care" unless your ear is tuned to that pitch. Obama's budget does not make that proposal, but it is the predictable consequence of everything he lays out. If (a) health care should be financed in a deficit-neutral way and (b) more revenue is needed, then (c) cutting back in some way on the tax preference for employer-provided insurance cannot be far behind. It's not exactly a profile in courage for Obama not to say this straight out. Yet the logic of his budget is that it implicitly signals openness to doing so.

These are good moves — even if, in a political season, they might be labeled flip-flops.

Ruth Marcus' e-mail address is

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Obama'a tax pivot 03/03/09 [Last modified: Thursday, February 28, 2013 12:02pm]
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