This just in from Joel Fox, President of the Small Business Action Committee. We wanted to get it posted right away. Attention Assembly Democrats: This plan HURTS the economy! We urge a NO vote…

From Joel Fox…

Small and medium sized businesses will ultimately carry more than a “fair share” of funding for the health care plan now being constructed in Sacramento.  The plan requires businesses to fund health care for employees according to a formula based on wages and social security payments. Other funding mechanisms are a tax on hospitals, mandated individual insurance and a possible doubling or even tripling of the cigarette tax. Under the business revenue formula, businesses up to $250,000 in payroll must cover their employees’ healthcare or pay 1% of payroll into a state run pool for healthcare. Those employers with payrolls of $250,000 to $1 million will pay 4%. From $1 million to $15-million the tax is 6%. Over $15-million the levy is 6.5%. However, there is no inflation escalator clause being discussed for the funding measure. If that doesn’t change, then as time goes on many small and medium sized businesses on the low and middle end of the scale will jump into a higher tax bracket. In 1982 Californians overwhelming passed a Howard Jarvis initiative to index income taxes to inflation. Because of this taxpayer protection, when a worker receives a wage boost to cover inflation he or she does not end up with less purchasing power because that worker jumped into a higher tax bracket.  A similar indexing protection for businesses is not being provided by those who are preparing the initiative that will fund the ambitious health care plan now on the table.

Businesses eventually will carry even a greater share of the burden when one considers that part of the revenue from the health care proposal will come from an increase in cigarette taxes.  The truth is the cigarette tax is a declining revenue source. According to state Board of Equalization figures, cigarette tax revenue went from a high of $1.166 billion in the 1999-2000 tax year, right after the tax was increased by initiative to fund pre-school children’s programs, down to $1.026 billion in 2005-6, a drop of $140-million. Furthermore, the Board estimates that evasion of the cigarette tax through out-of-state purchases by consumers via the internet or mail and retail outlets acquiring contraband cigarettes amounts to a loss of about $182-million in revenue each year. That total is nearly 18% of the revenue collected from the cigarette tax. Won’t the evasion rate increase if the tax on cigarettes doubles or triples?

Taxing a product more lessens its appeal. San Francisco Mayor Gavin Newsom hopes to see a reduction in the consumption of sodas, which he claims is a source of childhood obesity, by levying a city tax on soda. Taxing cigarettes may cut down on smoking, which in itself is a plus for health care, but relying on cigarette taxes to fund health care is a mistake.           

If the cigarette tax doesn’t capture the expected revenue how will the gap be filled? One of the answers is that without an inflation clause the builders of the health care plan are counting on small and medium sized businesses to fill the gap by moving into higher tax brackets further cutting into these businesses bottom lines.

At best, figuring what the health care plan will cost is a best-guess scenario. Massachusetts introduced a universal health care plan last year but soon discovered that once it was implemented the initial cost estimates were low. If the same holds true for the California plan what trigger mechanism will be put in place to secure more funds and who will be required to pay up?

Unless some changes are made, the proposed California health care plan revenue model is being built on a field of quicksand.

This entry was posted on Monday, December 17th, 2007 at 12:00 am and is filed under Blog Posts.