FLASHREPORT

NUNEZ, SCHWARZENEGGER BRING US AN INCREDIBLY TERRIBLE HEALTH PLAN

An exclusive column penned for the FlashReport by State Assemblyman Chuck DeVore (R-Irvine)

[Publisher's Note: We are pleased to present this original commentary from California State Assemblyman Chuck DeVore - Flash]

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in·cred·i·ble –adjective

1. so extraordinary as to seem impossible: incredible speed.
2. not credible; hard to believe; unbelievable: The plot of the book is incredible.
—Synonyms: farfetched, astonishing, preposterous.

"It's an incredible plan," said Assembly Speaker Fabian Nuñez (D-Los Angeles).

The Speaker’s quote about the just-struck agreement on government healthcare with Governor Schwarzenegger unintentionally speaks volumes.  

Incredible, farfetched, preposterous, hard to believe – call it what you will, the plan will cost far more than advertised and will drive business out of state, reducing state tax revenue and throwing people out of work.  

Beginning with a low-balled $14 billion price tag, the plan to increase taxes on business, hospitals, and tobacco to provide health insurance to 3.6 million people will devastate an already unsteady economy.  California’s budget already has a $14 billion hole in it, thanks to a complete lack of spending discipline and a housing boom gone bust.  Adding massive new taxes and a massive new social welfare program will compound the problem and push California over the brink of financial disaster.  

The State Assembly is expected to vote on the government health insurance plan late Monday night, December 17.  It is expected that Democrats will push through the healthcare deal without the tax increases to pay for it, as new programs need only a simple majority to pass while new taxes require two-thirds approval of the Legislature.  The higher hurdle for tax increases will force the Democrats and the Republican governor to punt the tax hike to the people as a ballot initiative, probably in the November 2008 election.  

Governor Schwarzenegger and Speaker Nuñez intend to pay for this big increase in government with three new taxes: a $2.3 billion tax on hospitals, a $1.50 per pack tax increase on cigarettes, and a new payroll tax on business.  Many hospitals say they want the new tax as they expect to get more than that back in insurance reimbursements.  Of course, some hospitals would rather not be taxed, highlighting the fact that taxes are levied with the power of government compulsion.  The latter two taxes are more problematic.  

Taxing tobacco is always popular in health conscious California.  The (happy) problem is that fewer and fewer Californians smoke every year, making this a declining source of revenue.  Some analysts are already expecting that the new tax would have to be set at $2 per pack to make up for a declining base of smokers and a higher loss of tax revenue due to increased tobacco smuggling by criminal gangs.

The tobacco tax would be a mere annoyance compared to the havoc the payroll tax would wreck on business.  The plan calls for small businesses with payrolls of up to $250,000, under 10 employees for most California businesses, to spend at least 1% on healthcare for their workers.  If they didn’t, they would get hit with a payroll tax to fund a state-run health insurance pool.  Firms with payrolls of up to $1 million would have to pay 4% of their payroll costs to healthcare while those with payrolls up to $15 million would have to pay 6%.  Bigger companies would have to pay 6.5%.  Such a payroll tax and healthcare cost mandate will severely distort market forces.  It will encourage small business owners who already provide healthcare coverage to drop it in favor of the state subsidized system.  It will also cap business growth since an employer could see a large increase in payroll costs with a commensurate drop in profit as their labor costs crossed a key threshold at $250,000, $1 million, or $15 million.  

Even more discouraging is the fact that this new tax talk is occurring at all.  Governor Schwarzenegger was elected and reelected on a no new taxes pledge.  In 2003, the year of the recall, the Tax Foundation ranked California 44th in the nation on its overall state business tax climate.  After the governor pushed along workers compensation reform and cut the car tax, California’s overall standing rose to 39th – a good start, but still far less friendly to businesses that provide jobs and pay taxes than any of our Western neighbors.  Since then, California’s competitiveness has fallen so that our 2008 business tax climate ranking stands at an abysmal 47th – just ahead of New York, New Jersey, and Rhode Island.

The Tax Foundation, a national nonpartisan educational group founded in 1937, says California has the highest individual income tax rate in the nation with one of the most highly progressive tax rate structures in the nation.  Most small business owners pay their business taxes at the rates for individuals, so this high tax comes at the price of discouraging entrepreneurship.  Meanwhile, California’s corporate income tax rate is the highest among Western states, serving as a powerful inducement to relocate out of state.  Our sales tax rate exceeds the national average and, even with Proposition 13, our property taxes are only slightly below the national average.  Add these taxes up to the proposed new payroll taxes for healthcare and you get a formula for California having the worst business tax climate in the nation.  

Thankfully, in addition to legislative Republicans, who have been left out of the sweeping healthcare deal between Schwarzenegger and Nuñez, a voice of reason has emerged from an unlikely source: Senate President Pro Tem Don Perata (D-Oakland).  Perata, who supports most of the government healthcare plan, said he will delay a Senate vote on it until the Governor explains how he will close the ballooning $14 billion deficit without hurting the poor and disabled with healthcare cuts on existing welfare programs.

Polls show that Californians are satisfied with the quality of their healthcare.  Our challenge is not with access to healthcare, but rather with how to pay for it.  Organizations on the left, such as the California Nurses Association and the California Endowment, a billion dollar-plus nonprofit ostensibly created to fund healthcare for the poor, favor a total government takeover of the healthcare system.  At the other end of the political spectrum, legislative Republicans have repeatedly called for applying free market principles to an over regulated industry.  Republican proposals, never granted a full hearing, include allowing out of state health insurance to compete in the California market, promoting health savings accounts (California is one of only four states that taxes health savings accounts), and encouraging low cost healthcare clinics at retail chains as has been successful in other states.  

California’s budget is collapsing under the twin pressures of unrestrained government spending and a tax code that punishes productive taxpayers with the highest income tax rates in America.  This cannot continue.  Business-friendly Nevada rates the 3rd best business tax climate in America; California ranks 47th.  We need to cut tax rates, not increase them.  Government must live within our means to pay for it.  To do anything else would be incredible. 

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Assemblyman Chuck DeVore, a Republican,  represents the 70th Assembly District in Southern California. He is the Vice Chairman of the Assembly Revenue and Taxation Committee. You can read more about the Assemblyman at his website here.