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GOP Senators Revive Fake Offset for Medical Device Tax

Republican Senators Collins, Murkowski, and Ayotte are reportedly pushing to repeal health reform’s medical device tax — which helps pay for extending coverage to millions of uninsured Americans — as part of the price for reopening the government.  As we explained last week when a similar proposal emerged in the House on a bipartisan basis, that’s a terrible idea for several reasons.

First, the tax is sound and the arguments against it do not withstand scrutiny.

Second, the proposal purports to pay for the real cost of repealing the tax (about $30 billion over the next decade) with a fake offset:  a timing gimmick that would bring in more revenue within the ten-year budget “window” but lose significant revenue after that.

Third and more fundamentally, giving such concessions in return for reopening the government would simply encourage such hostage-taking in the future.

The proposed offset, known as “pension smoothing,” would allow companies to “smooth out” their contributions to their employees’ pension funds over time.  Employers would contribute less in the short and medium term, and more in the longer term.  These contributions are tax-deductible, so shrinking them would raise employers’ income tax payments — and thus overall federal tax revenues — in the years immediately ahead.

But the revenue gain would be only temporary.  Employers would have to contribute more to their pension funds in later years under the smoothing formula.  That means they would take higher tax deductions for pension contributions in those later years and pay less income tax than under the current rules.

So, the proposal could produce a net revenue gain within the ten-year budget window but subsequent revenue losses.  If coupled with repeal of the medical device tax, such a package would raise deficits by billions of dollars each year in the long run.

Put another way, Senator Collins’ proposed “pay-for” can’t pay for anything.

A similar but somewhat more modest smoothing provision was enacted in the 2012 highway bill.  The Joint Committee on Taxation estimated it will raise $16.5 billion in revenue over the first five years but then lose $7.1 billion over the rest of the ten-year budget window.  This produced a net revenue gain of about $9 billion for the ten years as a whole, but it will increase deficits in subsequent years as the revenue losses continue for a number of years beyond the budget window.  The new proposal apparently would enlarge upon the 2012 provisions, producing a similar pattern of short-term revenue gains offset by higher deficits in later years.

While the timing gimmick represents terrible policy, demanding changes to health reform in return for reopening the government is objectionable for a more basic reason.  Giving concessions in return for avoiding or ending a government shutdown — or avoiding a default — would only make shutdown (and default) threats by congressional minorities, in order to extract policy changes they can’t otherwise win, a regular feature of the political landscape.  That would threaten the functioning of our political system and potentially our democracy itself.