The 10-year cost of health care reform is expected to be more than $1 trillion, with some estimates putting the cost at $1.2 trillion (although the President's budget proposes a "downpayment" of $635 billion).

As discussed in recent versions of the Washington Budget Report, this year's Congressional Budget Resolution requires that health care reform be deficit neutral by fully offsetting the costs of expanded coverage with spending reductions and/or tax increases. This is required whether health care reform moves as a free-standing bill with bipartisan support, or as a special expedited "budget reconciliation bill" with primarily Democratic support.

In short, the budget framework adopted for this year requires that extending health coverage to all Americans must be fully paid for. There are several ways to approach this:

OPTION 1: Medicare and Medicaid Reforms. The President's Budget proposes Medicare and Medicaid savings of $300 billion over 10 years. In addition, as discussed in last week's WBR, the Congressional Budget Office has published an extensive book of Medicare and Medicaid savings options at: http://cbo.gov/ftpdocs/99xx/doc9925/12-18-HealthOptions.pdf. For a summary of the savings options go to: http://www.concordcoalition.org/budget-report/148801/18-2009.

Option 2: Eliminate or Cap the Tax Exclusion for Employer Provided Health Benefits. Millions of employees in the U.S. receive health insurance benefits from their employers. Even though health benefits are a form of compensation, the tax code specifically excludes health benefits from taxation. This exclusion will cost the Treasury $155 billion* in lost revenues in 2010 alone and more than $2 trillion over 10 years. Taxing only "high-end" health benefits would still bring in nearly a half trillion over 10 years. (*President's Budget, Analytical Perspectives, Table 19-1).

Option 3: Cap Itemized Deductions for High Income Earners. The tax code allows taxpayers to deduct from their income amounts such as mortgage interest, state and local income and property taxes, charitable deductions, and medical expenses above a threshold. The Obama Administration has proposed limiting to 28% the rate at which itemized deductions reduce tax liability (as opposed to current law where upper income taxpayers enjoy up to a 35% deduction). This would save an estimated $267 billion over 10 years.

Option 4: VAT Tax. Some policy analysts have suggested imposition of a Value Added Tax (VAT) as a way to pay for health care reform. A VAT--which is common around the world, including in Europe--is a broad tax on the transfer of goods and services, ultimately paid by the consumer. Senate Budget Committee Chairman Kent Conrad (D-ND) told the Washington Post "I think a VAT and a high-end income tax have got to be on the table (as part of tax reform)." However, the White House has been cool to the idea of a VAT to pay for health care reform. OMB Spokesman Kenneth Baer has said, "while we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers."

Option 5: Carbon Tax or Auctioning CO2 Allowances. Another option available to Congress would be to pay for health care reform, at least in part, from revenues derived from climate change legislation. Climate change legislation, aimed at reducing CO2 emissions, will include either a new tax on carbon or receipts from federal auction of CO2 emission allowances. However, many proponents of climate change legislation, including the Administration, want to reserve revenues from a carbon tax or cap-and-trade allowances to pay for: (1) green infrastructure investment; and (2) tax cuts to offset high energy prices resulting from climate legislation.

The Congressional Budget Office (CBO) released a report May 27th on "The Budgetary Treatment of Proposals to Change the Nation's Health Insurance System." CBO scoring decisions are critical to the health reform process since congressional budget rules require that the federal "costs" of health care reform be "fully offset" by tax increases or spending cuts. Highlights of the report:

• An "individual mandate," that is, a requirement that all Americans have health insurance does not constitute a government tax as long as the government is not collecting the premiums and is not tightly controlling the insurance plans. (An analogy would be auto insurance, which people are required to have, but the auto insurance plans are operated by the private sector.)


• Federal health care subsidies for low-income people and small firms would be scored as direct costs to the federal government.


• A widely discussed health reform option would establish a public health insurance plan to exist side-by-side with private insurance. If the federal government stands behind the plan financially, then its expenditures would be considered federal outlays and the payments collected for premiums would be considered federal receipts.


• Some plans would impose a "Play-or-Pay" requirement whereby firms choosing not to offer health insurance to employees would pay a penalty. Similarly, individuals not complying with a requirement to have insurance would pay a penalty. These payments would be considered federal revenues.


• If health insurance "exchanges" are created and tightly controlled by the government, then premiums would be included in the federal budget. However, if the exchanges exist simply to facilitate payments to private insurance companies, then premiums would not be included in the federal budget.

Full Text of CBO Report

House appropriations subcommittees will begin marking up FY 2010 appropriations bills the week of June 1st -- aiming for House passage of all 12 bills before the August recess. Passage of each bill involves painstaking negotiations on a broad range of issues.

In general, congressional appropriators face the task of reconciling the President's FY 2010 discretionary funding requests that total $10 billion more than the amount allowed by the FY 2010 congressional budget resolution (see April 30, 2009 WBR).

Appropriators will also have to decide whether to accept the $17 billion in program reductions and terminations proposed by the Administration (see May 11, 2009 WBR). Many of these programs, such as the Education Department's Even Start program, have staunch advocates in Congress. Obama Administration's proposed "Terminations, Reductions, and Savings"

Following is a sampling of some of additional facing the appropriators, as reported recently by Congressional Quarterly. The numbers in parentheses are the FY '09 regular appropriations level in billions (not including stimulus funds), followed by the FY 2010 President's request.

1. AGRICULTURE ($21.6 / $22.9) -- Major issues include the President's proposed 6.5% increase over the current year; overhaul of the food safety system; and the President's proposal to end direct payments to farmers with more than $500,000 in annual sales revenue.

2. COMMERCE-JUSTICE-SCIENCE ($60.1 / $64.4) -- Major issues include the President's proposed 7% increase over the current year; funds to close Gitmo; a major Southwest Border Initiative; readiness of the Census Bureau for the upcoming census; and and NASA's post-space shuttle priorities.

3. DEFENSE ($489 / $512) not including $129 billion for war funding and $23 billion for military construction and housing which are funded in a separate bill -- Major issues include termination of the F-22 fighter and the C-17 transport; proposed cuts in missile defense; proposed cuts in the Army's Future Combat Systems; and rising personnel costs.

4. ENERGY WATER ($32.8 / $32.9) -- Major issues include how to continue the big boost in renewable energy research after the stimulus bill's funds run out; the President's proposal to cut funding for the proposed nuclear waste facility at Yucca Mountain, Nev; and the adequacy of funding for water infrastructure projects.

5. FINANCIAL SERVICES ($22.8 / $24.2) -- Major issues include U.S. policy toward Cuba; education vouchers in the District of Columbia; funding to states to upgrade voting equipment; and a proposed OMB program to improve the efficiency of state programs receiving federal funds.

6. HOMELAND SECURITY ($40 / $42.7) -- Major issues include funding efforts to find and deport illegal immigrants; the fence along the Mexican border; whether the proposal to cut the DHS budget starting in 2012 is realistic; and increased funding for road and rail security.

7. INTERIOR-ENVIRONMENT ($27.6 / $32.3) -- Major issues include earmarks for water projects; eliminating a program to clean up diesel engines in California; adequacy of wildfire funding; drilling in federal lands and waters; and new taxes and fees on the oil and gas industry.

8. LABOR-HHS-EDUCATION ($136.4 / $144) -- Major issues include modifications to funding of the Pell Grant program; funding for school construction; increased funding for OSHA; increased funding for NIH after the stimulus funds run out; and the Administration proposal to eliminate abstinence-only education.

9. LEGISLATIVE BRANCH ($4.6 / $5.1) -- Major issues include the Architect of the Capitol's budget; and requests for more staffing at CBO and GAO.

10. MILITARY CONSTRUCTION - VA ($72.9 / $76.3) -- Major issues include advance appropriating FY 2011 funds for VA health care; and funding levels for military construction.

11. STATE-FOREIGN OPERATIONS ($36.6 / $52.0) -- Major issues include the President's proposed 9% increase for the State Dept. and foreign aid programs; funding for Bush's Millennium Challenge Corporation (aimed at countries that adopt democratic and free-market policies); and funding for the U.N. Population Fund (which is strongly opposed by anti-abortion groups).

12. TRANSPORTATION-HUD ($57.8 / $106.6) assuming the need for money from the general fund to supplement the Highway Trust Fund -- Major issues include how to make up the shortfall in gasoline tax revenues flowing into the highway trust fund; funding for a new air traffic control system; increased funding for the Community Development Block Grant program; and increasing loan guarantees through the FHA.