Tax Hike on Health Plans Causing Major Angst in Sacramento . . .

Currently on the front burner in the State Capitol is the extremely contentious (and complicated) issue of taxing “managed care organizations.” Because of federal requirements under Obamacare, California must alter the manner in which it taxes healthcare plans or risk losing billions in federal money. But the question everyone is asking is whether the proposed legislation constitutes a tax increase. That question is not merely academic because its answer has significant policy and political ramifications.

While the determination of whether a legislative act imposes a tax may not be that important in other states, it certainly is in California. A requirement imposed by Proposition 13 is that “tax increases” be approved by a two-thirds vote of each house. Thus, although the majority Democrats have almost a two-thirds majority, they lack the power to raise taxes without at least some Republican support. And because most Republicans run for office as fiscal conservatives, they are loath to vote for anything that raises the tax burden on citizens or businesses.

But the question of whether a legislative act is a tax hike isn’t always that simple. Take for example the unpopular “fire tax” imposed on hundreds of thousands of California property owners in rural areas. This unpopular tax – imposed when California’s budget was deeply in the red – was designed to force property owners residing in “State Responsibility Areas” under the jurisdiction of CalFire to pay for various fire protection programs whether they benefited or not. The legality of that tax is currently subject to a class action lawsuit because it never received a two-thirds vote of the legislature.

And then there is the issue of “revenue neutrality.” Is something that raises taxes on one group only to be offset by tax reductions to another a “tax hike?” It certainly is for the person or business whose taxes are raised. Fortunately, this issues was resolved in large part by the passage of Prop 26 which requires a two-thirds vote if anyone’s taxes are raised.

Being familiar with state taxes for the last 35 years, the Howard Jarvis Taxpayers Association takes a keen interest in many of the more arcane issues of tax policy: What bills require a two-thirds vote? What is revenue neutrality? Should the elimination of a tax credit that no longer serves a legitimate public purpose be opposed even though it technically qualifies as a tax increase? To what extent will a tax hike on businesses ultimately be borne by others?

Although HJTA’s tax expertise is usually respected by friend and foe alike on a broad array of tax and economic issues, some forget that our analysis of any policy is driven by one fundamental question: What is the impact on citizen taxpayers? And by citizen taxpayers we simply mean the millions of ordinary men, women and their families – either working or retired – who are not part of any special interest group.

Because we have been asked by dozens of legislators and those in the media to comment on the MCO tax, we have spent a fair amount of time analyzing the proposal. And, as noted above, our sole focus is on the law’s impact on citizen taxpayers and consumers. What we understand at this point is that the proposal has been crafted so as not to impact ordinary folks. We hope that is true and borne out by our final analysis.

Should HJTA adopt a position of neutrality on the MCO tax proposal, in no way should this be interpreted as some official “taxpayers’ imprimatur” on all healthcare laws either at the state and federal level. Indeed, we believe that the state of healthcare services in America and California is a disaster in need of radical reformation based on free market principles and consumer choice. As for Obamacare itself, the late – and very great – Justice Scalia, accurately labeled it an illegal tax hike.

Moreover, a pass on the MCO tax may very well reflect the fact that California taxpayers have much bigger fish to fry.  Specifically, proposals to substantially increase a variety of transportation taxes are bound to be a non-starter for a majority of Californians who have seen their high gas taxes squandered on low priority projects and wasted to a degree that would make even the most profligate politician blush. On some issues, taxpayers know how to draw a hard line.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.