Anti-Tax Jihad Turns On Itself

Amid all the scurrying about on Capitol Hill last week before Congress left for its August recess, a remarkable story unfolded in the world of anti-tax activists and politicians that has not received enough attention.

Robert Novak tells the story, with great dismay, of how some Republican Senators considered introducing a proposal that would change the way the tax code treats health insurance purchased by individuals (as opposed to obtained through an employer) which is an idea that the President proposed in January. This plan would end the tax subsidy for employer-based health insurance and create one for individually purchased health care, and the net result over time would actually be a tax increase because most people would probably stay in employer-based health care. The proposal was taken up by a group of conservative Senators as an alternative to the bills passed by both chambers to expand the State Children's Health Insurance Program (SCHIP).

But the conservative Senators behind this effort would never dream of increasing taxes. So they included in their proposal a provision making the new tax credit for health insurance refundable for low-income people, making the bill budget-neutral.

Let's put aside for a moment the many, many problems with pushing families onto the individual health insurance market, where the plans offered are more expensive and less generous and probably encourage people to go without needed care. The Center on Budget and Policy Priorities does a good job of explaining this, so I won't dwell on it.

Let's assume for a moment that we are clueless enough to believe that this is a good proposal from a health policy perspective. Or let's say we don't even care about health care. Let's say we're conservatives who just don't want taxes raised. As conservatives, we might think that this proposal is reasonable because it's budget-neutral. Sure, it raises taxes in some places but it makes up for it by reducing taxes for low-income people who are purchasing health insurance, right? The Heritage Foundation, which is not exactly known for its bleeding heart concern for the poor or its fondness for tax hikes, found this reasoning persuasive and supported this proposal.

But apparently moving the tax burden around so that poor people have less of it constitutes a major sin in the anti-tax scriptures as set forth by Grover Norquist. His organization, Americans for Tax Reform, issued a statement that this proposal is a tax hike and anyone who signed the group's "Taxpayer Protection Pledge" and then voted for this proposal would be violating the pledge.

The logic ATR uses is that the refundable tax credit payments to people with no federal income tax liability is counted as "spending" in the budget process, so really this bill increases taxes to pay for increased spending.

This is ludicrous. Whether you want to call the refundable tax credit payments new "spending" or new "tax refunds" is really a matter of semantics. The families benefiting are not "non-taxpayers" as ATR's statement calls them. The vast majority of these families has at least one bread-winner who is paying federal payroll taxes (which are extremely regressive) so the refundable tax credits really could be said to offset a portion of payroll taxes. From this perspective, you could say that in most cases refundable tax credits are a "tax reduction" rather than "spending." That is, if you wanted to be that technical.

(Some people say payroll taxes are totally different from income taxes because payroll taxes pay for specific progressive benefit programs, but this is ridiculous. Social Security taxes can be used to pay for any government spending, since there is no "lock-box" that they go into to be truly "saved" for retirees, and the federal government is obviously spending the Social Security surplus right now to keep the government running).

The real problem that ATR has with this proposal is that the responsibility for funding the federal government would be moved slightly from people who can least afford to pay to the wealthy people who have benefited the most from Bush tax cuts. Any movement in that direction is not even worthy of discussion for the anti-tax crowd.

Think for a moment about what this rigid thinking by the anti-tax activists means for them. Imagine the House Democrats finally pass the plan they're developing to eliminate the Alternative Minimum Tax for tens of millions of families and pay for it by scaling back the Bush tax breaks for the richest one percent. ATR is sure to oppose this because it involves "tax increases" on a tiny elite even though the vast majority of families benefit. That sounds like a winning strategy.

The anti-tax people have long benefited from the simplicity of their message of "no tax hikes." But as we move into a time when everyone agrees that the government needs to do more about health care and national security, not to mention make some reforms to the tax code, this rigid, simple no-new-taxes ideology is becoming an albatross for them. Not that I'm terribly concerned for them.