BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Jenny Oropeza, Chair
SB 1014 - Kuehl
Amended: As Proposed to be Amended
Hearing: April 25, 2007 Fiscal: Yes
SUBJECT: Imposes a payroll tax on employers and employees
for the purpose of funding a single-payer health
care system.
EXISTING LAW
Imposes the personal income tax on most individuals in this
state. The personal income tax is administered by the
Franchise Tax Board (FTB) and applied at specified rates
dependent on income level. Existing law also imposes
payroll taxes administered by the Employment Development
Department (EDD). For employers, the EDD administers and
collects unemployment insurance and the employer training
tax. The employee contributions withheld by EDD consist of
disability insurance and the personal income tax.
THIS BILL
Creates the California Health Insurance System Funding Law
and creates a health care coverage premium which consists
of the following taxes:
One percent on taxable personal income in excess of
$200,000 but under $1 million
An unspecified percentage on self-employment income
over $7,000 and under $200,000
An unspecified percentage on the amount of non-wage
income of individuals under $200,000
A 3.78% increase in the employee share of the
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payroll tax of income over $7,000 and under $200,000
A 8.17% increase in the employer share of the
payroll tax of an employee's income over $7,000 and
under $200,000
The bill specifies that existing definitions from the
Unemployment Code shall be used to administer the tax. The
bill requires EDD and FTB to promulgate regulations to
implement these provisions. SB 1014 also requires every
employer who pays wages to withhold the healthcare premium
in an amount to be determined by the FTB.
The bill also provides that provisions related to allowance
of credits, filing status and recomputation of the income
tax brackets do not apply to the additional tax.
The bill requires revenues from all taxes referenced in the
bill to be deposited into the Health Insurance Fund and
provides that the revenues in the fund shall be
continuously appropriated to the California Health
Insurance Agency for the purposes of funding the California
Universal Healthcare System.
FISCAL EFFECT:
Significant new revenues of approximately $80 billion,
which would be directed for the purposes of the California
Universal Healthcare System (CUHS), under which all
California residents would be eligible for specified health
care benefits. CUHS would replace private health insurance
as the primary payer for health care services in the state.
COMMENTS:
A. Purpose of the bill
According to the author, SB 1014 is necessary to fund the
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California Universal Healthcare System contained in SB 840
which will address California's need for a reform of the
state's health care system.
The author states that SB 1014 would replace all premiums,
co-payments, and health related out-of-pocket expenses
currently paid by employers, individuals and government,
with a more affordable and reliable health care finance
system. The author further states that SB 1014 is drafted
so that tax burdens imposed reflect the ways in which
Californians currently pay for health care so that the
responsibility for paying for health care will be shared
between employers and individuals. The author notes that
another important benefit of SB 1014 is that it addresses
the significant problems faced by both public and private
employers in accounting for and funding retiree health
benefits as required under federal law through the
Financial Accounting Standards Board (FASB) and the
Governmental Accounting Standards Board (GASB).
The author states that numerous indicators show the depth
of the problems facing the state's health care system,
including the fact that nearly one in five Californians are
uninsured and employers are decreasing or dropping health
care benefits for their employees and retirees. The author
states that the rise of health plans characterized by
expensive deductibles and co-payments represents the final
indicator of a crumbling health care system that fails to
keep even insured families out of bankruptcy when they
experience a serious illness.
The author points out that despite the fact that the United
States spends over twice as much as most other
industrialized countries on health care, it remains the
only such country to leave 20 percent of its population
without health insurance and without protection against
serious illnesses. The author states that existing laws
and programs have led to a highly fragmented health care
system that is administratively complex and that diverts
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billions of dollars from health care services to
administrative costs, and that piecemeal reforms are no
longer feasible. The author asserts that the current
system provides health care based on income and insurance
status rather than on medical need and provides no
mechanisms for stabilizing rapid growth in health care
spending.
The author cites an analysis by the Lewin Group of an
earlier version of SB 840, which found that a universal
health coverage system like the one proposed in SB 840,
could achieve universal coverage while reducing total
health care spending in California. SB 1014 implements the
recommendation of the Lewin Group.
B. Lewin Analysis<1>
The report produced by the Lewin group resulted in an
earlier but substantially similar version of SB 840. The
analysis determined that SB 840 would achieve overall
savings of more than $29 billion. The primary source of
savings resulted from administrative costs savings
associated with replacing the current system of multiple
public and private insurers with a single insurance plan;
estimated administrative savings totaled approximately $20
billion. Negotiated discounts associated with bulk
purchasing of prescription drugs and durable medical
equipment were estimated to save approximately $5 billion.
Most of the remainder of the savings resulted from an
increased emphasis on preventive and primary health care.
Under SB 840, those savings would be used to insure those
currently uninsured and consequently provide savings to
employers and families by reducing the subsidy paid by
insured persons to provide health care to the uninsured
(often referred to as the "hidden tax".) The report
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<1> A Single Payer Health Insurance Plan for All
Californians, John F. Sheils; Randall A. Haught, The Lewin
Group. www.healthcareforall.org/Lewin
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estimates that SB 840 would lead to an increase in
utilization of health care services on the order of $17
billion as comprehensive health benefits are provided to
all Californians. These increased costs would be offset by
the estimated savings outlined above. The report estimates
an average savings of $340 per family.
The Lewin analysis estimated that total health care
expenditures in California in the absence of any reforms
would be about $184 billion. Under SB 840 costs would fall
to about $167 billion. To fund the system proposed in SB
840, the report estimated that approximately $72 billion
could be obtained by redirecting funds from existing
federal, state, and local health care programs and close to
$1 billion would come from savings in state and local
employee health benefits programs. The remainder of
funding for SB 840 would come from several new revenue
sources, including employer and employee payroll taxes, a
self-employment business income tax, a tax on unearned
income, and a surcharge of incomes over $200,000, which
would replace all current premiums, co-payments, and
deductibles.
C. Economic Impacts
Opponents argue that SB 1014 is harmful for the state's
economy. Opponents point to a negative impact on small
business through an increase in personal income tax rates.
Opponents argue that this bill will chase away businesses
as it raises labor costs and would place California at the
highest tax rate of any state in the nation. Opponents
also argue that this bill will make California's income tax
more volatile as the state's personal income tax is already
heavily weighted to taxing upper income taxpayers.
Critics of a single-payer system argue that "the evidence
demonstrates without doubt that socialized medicine is
inefficient and more expensive than the free-market
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alternative."<2> Citing the tax burden of the National
Health Service in England, Conrad Meier argues
England's single-payer health care plan has
turned into a tax burden far worse than what
we've experienced to date in this country. The
burgeoning costs-in the form of high income
taxes, insurance taxes, premiums, lower wages,
reduced productivity and job opportunities, plus
extra fees and hidden taxation-have become a
stranglehold on middle- and low-income
consumers.<3>
While it should be noted that the English system is not, in
fact, a single-payer system (in England the government
controls and regulates all aspects of health care, under a
single-payer system the government would provide
remuneration and set fees), the sort of argument Meier
mobilizes forms the bulk of economic arguments against the
implementation of a single payer system in the United
States.
D. Taxes and the Economy
Proponents of this measure point out that using payroll
taxes as the method of payment for the CUHS makes sense as
the current system is based on employer and employee
payments. Social security and Medicare are similarly
financed and using payroll taxes and these taxes make sure
there is no impact on the state's general fund.
Opponents disagree, pointing out that this bill unfairly
singles out certain classes of taxpayers to fund a program
with general benefit and creates an unreliable new revenue
source for the program by relaying on volatile revenue
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<2>
http://www.heartland.org/archives/health/may02/myturn.htm
<3> Ibid
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sources such as the personal income tax. The opponents
also argue that these taxes will exacerbate the perception
of California as a high tax state, and will result in a
significant flight of businesses and economic activity from
California to lower-tax states. Opponents further state
that to the extent residents remain in the state, they will
find a way to avoid the system all together by going
underground
E. The Right Taxes?
The stated intent of this bill is to ensure that every
taxpayer contribute towards the CUHS similar to a premium
program. This bill partially accomplishes that goal by
addressing the various income sources and attempting to tax
each of them accordingly. The bill does not, however,
expect any person that earns under $7,000 or any person
that is unemployed to contribute to the program.
Generally, taxes that reach the unemployed or low wage
earners are considered regressive. The only truly
regressive tax in California is the sales tax.
This bill correctly assumes that the most compliant
taxpayers are wage earners with systematic withholding by
the EDD and that these taxpayers will almost certainly
comply with the new premium taxes. However, the
self-employment income tax and the non-wage tax will be
much more difficult to collect and enforce.
The author may wish to consider penalties for
non-compliance to ensure that these groups of people do in
fact contribute to the premiums. Penalties affect the
cost-benefit analysis of taxpayers and can be a significant
enforcement tool if applied correctly. For example, if the
cost of non-compliance were insignificant, the taxpayer
would take a risk and not pay the taxes. If there were
significant penalties associated with non-compliance (which
includes under-reporting), the taxpayer would be much more
likely to comply.
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The author may also wish to consider a broader definition
of self-employment taxes. The following amendment would
include all current sources of self-employment income:
"every individual in this state who receives income subject
to tax under Part 10 (commencing with Section 17001) of the
Revenue and Taxation Code."
F. $7,000-is it a loophole?
This bill excludes all income under $7,000 from the
taxation provisions. While the intent is to allow people
some ability to establish a salary before being subject to
the additional taxes, it is possible that some employers
and employees will categorize themselves as part-time with
multiple paychecks under $7,000.
In order to avoid this complication, the author may wish to
clarify that the $7,000 floor is total income from all
employment sources.
G. Phase In Approach
This bill would take effect for taxable years beginning on
January 1, 2008. In order for the tax agencies, tax
payers, employees and employers to prepare for this new
paradigm, the author may wish to consider a phased in
approach of the new taxes. Furthermore, it is unclear
whether the infrastructure for the single payer system
would be available immediately and whether it would need
start up costs before full implementation. This bill
should consider both of these questions in determining an
appropriate start date for these new taxes.
H. Proposition 98
Proposition 98 constitutionally requires that almost 50% of
any additional tax revenue to the state be appropriated for
K-14 education. No statutory bill could change this
requirement; therefore, the proposed taxes in this bill
would be subject to the Proposition 98 requirement. The
only legislative solution to subvert this requirement would
be through a constitutional amendment.
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Initiatives can and have subverted the Proposition 98
requirement; Proposition 63, for example, created a 1%
income tax surcharge on wealthy Californians and was not
subject to these provisions as they were constitutionally
omitted from the initiative.
If the funds raised by this bill are the minimum required
to create the funding source for the single payer program
and there is not constitutional amendment, the author may
wish to consider increasing the funding available in this
bill.
Support and Opposition
Support: California Alliance for Retired
Americans
California Nurses Association
California School Employees Association
Communication Workers of America, Local 9000
Gray Panthers
Health Access
Service Employees International Union, California
State Council
California Labor Federation
California Teachers Association
California Federation of Teachers
California Commission on the Status of Women
United Nurses Association of California/ Union of
Health Care Professionals
Oppose: California Chamber of Commerce
California Medical Association
Howard Jarvis Taxpayers Association
National Federation of Independent Business,
California
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Consultant: Gayle Miller
04/24/07 10:57