The Palmetto Insider

The blog of the South Carolina Policy Council

Archive for the ‘Capitalism’ Category

Health Care Law Already Hitting Home for HSA Consumers

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Even as foes of Obamacare celebrate their recent victories at the polls, more and more of the regulations mandated by the federal health care takeover (otherwise known as the Patient Protection and Affordable Care Act) are hitting their start date, and the reality is setting in quickly – we are all going to be affected by this law, and most of us for the worse.

Take HSAs, for example, which we have previously extolled as a tool to bring down health care costs. HSAs provide greater cost-saving incentives to consumers, who may roll over unused health care dollars from year-to-year and even use remaining dollars for retirement. But Health Savings Accounts are being marginalized by the new healthcare law.

The way HSAs work is like this. Imagine if you had insurance with which to buy a new car – much like we have health insurance to cover health-related expenditures. Well, if the new car is covered by insurance – and you pay a hefty premium to have this insurance – you will likely want to maximize the “benefits” you receive. So does everyone else in the insurance program.  Eventually, your choice and the collective choice under this plan will eventually jack up the cost and the price of your “car purchase insurance”. So when the next insurance bill comes in, everyone is complaining that their “car purchase insurance” is ridiculously expensive.

In short, you’ll buy the most expensive new car your plan allows and it is not secret that there is a price hike. But if instead you have a “car HSA” plan, you might think to yourself: “Should I spend all of my allotted car dollars on this one purchase? Or should I save some of that money in case I want to buy a second car later – or if this first car breaks and I need a new one?”

Based on these incentives, consumers with HSAs tend to only use the health care they need. Instead of over-consuming health care (which sometimes happens with regular insurance plans), HSA consumers weigh the costs and benefits of their health care decisions.

Unfortunately, the utility of HSAs is quickly deteriorating. As of January 1, 2011, over-the-counter purchases will no longer be HSA eligible. Consumers who don’t want to pay out-of-pocket for these items (about 15,000 in total, according to Fox News) will need a doctor’s note.

As Max Borders writes in the Washington Examiner, we have lobbyists to thank for this stomach punch to consumers:

First, Big Pharma (drugs) and the AMA (doctors) were both mixed up with writing Obamacare. This was clear from the start, but the progressives looked the other way. So, an army of lobbyists made sure that if a bunch of people were going to be forced by the feds to buy health insurance, they’d want to get some goodies out of all these newly minted HSA holders. How could all those lobbyists find a way to divert all those new customers into more expensive drugs and make them to go to the doctor more? Take them out of the driver’s seat. It has nothing to do with primary care paternalism. This is good old fashioned rent-seeking at its finest.

Additionally, this is another one of the ways the government has proposed paying for Obamacare. Which in essence, makes it a tax increase.

Other mandates are also making HSAs less affordable.

  • Covering children: Several major health insurers have dropped child-only policies because of the intense mandates that have gone into effect.
  • HSAs must cover 60 percent of actuarial benefit: According to the Heritage Foundation, only the Health and Human Services Department Secretary Kathleen Sebelius can know whether HSAs are viable under this plan. Will contributions count? If not, then HSAs will “no longer be viable.” Why is that? Because the HSAs revenue/expense system functions in exactly the opposite manner of traditional health insurance products. In traditional health insurance plans, premiums are the major revenue stream and deductible and co/pay are supplementary to cover the medical expense. In HSAs, contribution from members (function similar as deductible) is the major revenue stream while premium serves as a supplementary to cover the cost.
  • Medical loss ratio (MLR): Obamacare has mandated the health insurance companies spend at least 80 percent (85 for bigger companies) on “your health care.” What this does is limit choice in the market, by forcing some companies out of business who don’t meet this 80 percent level. It will also discourage spending on fraud prevention, because that will not be counted in the 80 percent. So every dollar spent on fraud prevention hurts an insurance company’s ability to hit the 80 percent level. Fewer choices in the market means fewer HSA plans. Fewer HSA plans means more expensive HSA plans. Either way, it’s bad for consumers.

HSAs are still a viable option for state-based reform. The South Carolina General Assembly could create a better tax environment for consumers who choose these health plans.

One example of a bill that was already introduced is S 998 from last session, which never made it out of committee. This bill – sponsored by Sen. Mike Rose and Sen. Shane Martin — would have allowed a 100 percent tax deduction or HSA premiums and created a fast-track approval process for new HSA plans that have already been approved by other states. Both of these items would add up to more choices for consumers.

Another way the state could counteract federal burdens on HSAs would be to create state-level exemptions. For example, the federal government removed tax-exemption from over-the-counter purchases. But there’s nothing stopping the state legislature from enacting a state-level exemption for South Carolinians.

South Carolina has at times been at the forefront of HSA legislation. The damage done to HSA plans by Obamacare opens the door for more state-based reform.

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Written by SCPC

November 24, 2010 at 12:47 pm

Governor-elect launches website to address budget crisis

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In January, Nikki Haley will be sworn in as the new South Carolina governor. Like nearly every other governor across the nation, she is inheriting a budget crisis.

One of Haley’s first actions was to establish a task force with the goal of addressing budget challenges. (Disclaimer: South Carolina Policy Council president Ashley Landess is one of five appointees to this task force.) The task force will, “assist Haley in identifying the most pressing fiscal challenges facing the state.”

Additionally, Haley’s team launched a website – http://www.scbudgetcrisis.org – that will solicit suggestions from taxpayers about ways to balance the budget. Individuals can submit ideas – anonymously if preferred – the task force can consider in working toward streamlining government.

This evokes images of the movie Dave, where an average Joe becomes president for a short time and in one scene, spends an afternoon with his friend trimming $650 million in fat from the federal budget, in order to save a homeless shelter. As the fake president and his friend (an accountant) look through the budget, the accountant quips:
“I’ve been over and over this stuff. It doesn’t add up. Who does these books? If I ran my office this way, I’d be out of business.”

Sums it up exactly.

Hopefully, the budget task force and website will bring that common sense approach to budgeting next year.

To that end, here are three easy fixes to get the ball rolling:

1) Cut agricultural marketing funding. The General Fund provides $562,000 for Marketing & Promotions to the Department of Agriculture. Yet the Clemson PSA receives $62 million already for these and other purposes. Let alone the fact that government does not need to be marketing farms, there is already substantial funding for these activities. And without profit motives, you get things like Palmettovore.

2) Cut state-funded tourism. Proviso 39.12 of the FY10-2011 budget funnels leftover tax dollars from the Motion Picture Incentive Wage Rebate Fund into tourism marketing. Proviso 39.1 allocates $1.375 million for tourism promotion, including money for private chambers: $105,000 for the Georgetown Chamber of Commerce; $50,000 for the Myrtle Beach Chamber of Commerce; and $20,000 for the Williamsburg Chamber of Commerce. These funds are in addition to $10.05 million for tourism advertising already allocated in the total state budget. Tourism marketers and private chambers should have to pay their own way, instead of forcing other taxpayers to subsidize their marketing and advertising.

3) Close the Statehouse Gift Shop. For some reason, each year legislators protect the Statehouse Gift Shop from budget cuts. This is absurd. Why continue to subsidize a business that keeps losing money? Stop this ongoing bailout for the gift shop and let private sector vendors fill the void. That’s how you create a stable job base. Moreover, anyone ever heard of priorities?

These ideas are just a start. And you can find plenty more on our website – for instance, here and here. But we encourage you to submit your own ideas to www.scbudgetcrisis.org.

Written by Geoff Pallay

November 18, 2010 at 1:26 pm

Downsize Government, Unleash Capitalism

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Cato has a new website – http://www.downsizinggovernment.org/ – that recommends specific cuts to federal agency budgets, including Agriculture, Transportation and Education. Not every agency is yet available, but the Department of Defense is up next.

Here are some of the cuts they recommend:

Agricultural Subsidies. As even the Washington Post acknowledges, many of these payments are being made to relatively well-off farmers who don’t need the money. (To see who’s getting such subsidies in South Carolina, read this Nerve story.) Savings: $10 billion to $30 billion a year.

Head Start. Notes Cato, “An authoritative HHS report on Head Start in 2010 conceded that the program produced few if any long-term benefits to participating children.” Further analysis of the report can be found here. Savings: $7 billion a year.

Alternative Energy Subsidies.  This entails taxpayer-funded research on hydrogen, solar, wind and other alternative energy sources.  As Cato argues, “Federal energy research should be phased-out as an unneeded cost in an era of massive government budget deficits. The private sector is entirely capable of performing research into coal, nuclear, solar, and alternative energy sources for itself.” Savings: $1.5 billion a year.

Taking the federal government’s lead, it’s no surprise South Carolina is funding many of the same initiatives, including hydrogen research and questionable day care programs. Instead of raising taxes next year to sustain such spending, state lawmakers should downsize government and unleash capitalism.

Written by Jameson Taylor

October 21, 2010 at 9:59 am

Gross receipts tax hurts small businesses

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Earlier this year, the Policy Council began providing research on local government issues – particularly in Aiken – surrounding the city’s arcane business licenses policies.

In short, business owners in most municipalities are forced to pay governments for the right to conduct business. Take this snippet from the City of Aiken business license ordinance:

Every person engaged or intending to engage in any calling, business, occupation or profession listed in the rate classification index portion of this ordinance, in whole or in part, within the limits of the City of Aiken, South Carolina, is required to pay an annual license fee for the privilege of doing business and obtain a business license as herein provided.

Additionally, the manner in which these licenses are levied – through a gross receipts tax – makes the system even more burdensome to business.

The entire gross receipts system is based on a single sentence in the state code of law. In South Carolina, Section 5-7-30 grants municipalities the right to: “levy a business license tax on gross income”

Take for example, the company that earns $50,000 more in gross receipts than the prior year. That company then uses that $50,000 to hire another employee. Because their license is based on gross receipts – and not profits – their tax burden increases – regardless of whether they actually had higher profits.

Now, two Southeastern economists have explored the issue of gross receipts taxes – an issue Georgia is researching with a tax commission similar to TRAC.

Robert Lawson and Frank Stephenson, writing for the Georgia Public Policy Foundation, offer some number crunching on how destructive this form of taxation is on business.

“…when the tax base is gross receipts rather than net receipts, the tax is effectively larger on low profit margin firms (such as grocers) than on higher profit margin firms. Moreover, the taxation of gross receipts rather than net receipts means that firms incurring losses are still subject to the tax. That could act as an impediment for start-up firms, which often require some time before becoming profitable. Applying the tax to firms incurring losses also means that the gross receipts tax bears no relation to firms’ ability to pay, one of two commonly cited normative criteria for tax equity.”

Georgia has been looking at adopting a gross receipts tax. But South Carolina’s experience with the tax should give lawmaker’s reason to reconsider.

  • To begin with, the tax is not transparent. As Lawson and Stephenson write: “That the tax is embedded rather than appearing as a separate line item on sales receipts is probably part of the renewed appeal of gross receipts taxes among state politicians. Customers who see the price of bread rise by a few cents may not realize that a new gross receipts levy is responsible for the increase.”
  • Second, taxes are supposed to be based on the benefit principle – which states that tax burdens should be relative to the benefits received from government services. As Stephenson and Lawson point out, “Since a gross receipts tax makes no adjustments for the intensity of firms’ use of government funded services (e.g., roads), it is not consistent with the benefit principle of tax equity.”

With all the talk about cutting taxes for business, especially small businesses, lawmakers should look at replacing the gross receipts tax with a flat fee. In Georgia, for example, many municipalities use a national “profitability ratio” to determine the fee. Under this scenario, each type of business pays a similar license fee – which lowers the compliance costs for the business by simplifying the process.

Fixing this tiny section of state law would provide a huge boost to businesses – without having to play special interests or favorites.

Written by Geoff Pallay

October 20, 2010 at 7:46 am

More status quo: SC performs poorly in Forbes ranking

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Yesterday, we wrote about South Carolina ranking 41st in terms of state legislative competitiveness.

In what is sadly becoming “another day at the office,” South Carolina finished 34th in a Forbes magazine ranking of the best states for business and careers.

That ranking is an 9-spot plummet from last year’s 25th overall placement.

The rankings use six different metrics to create their rankings: costs, labor supply, regulatory environment, current economic climate, growth prospects and quality of life.

This year, the lowest ranking category for South Carolina comes from the “Quality of Life” category, where the Palmetto State is 45th.

Meanwhile, our neighbor to the north — North Carolina — ranked 3rd overall.

Last month The Nerve reported that South Carolina paid one magazine thousands of dollars for advertisements — right before they released new rankings that showed South Carolina performed well in business climate.

Personally, I prefer rankings where the bias is not exposed through donations and advertisements.

While rankings should be taken with a grain of salt, one wonders how many times South Carolina performs poorly before the status quo changes.

Written by SC Policy Council

October 15, 2010 at 10:09 am

1099: The Trojan Horse within Obamacare

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The new federally mandated healthcare experiment continues to be the gift that keeps on giving – only we wish it would just stop rearing its ugly head in our daily lives.

Last week we reported on the regulatory problems facing Medicaid reimbursement – and the coming $1 billion increase in costs for South Carolina.

Now, comes the 1099 fiasco. Earlier this month, the Senate failed to repeal a provision of Obamacare that adds a major compliance burden to small businesses and independent business owners.

Buried within the federal health care mandate is an unnoticed provision that requires all businesses to report to the Internal Revenue Service any purchase from a vendor for goods and services amounting to $600 or more per year.

What does that mean? Well, if you work from home and purchase a computer for more than $600, prepare to send a 1099 tax form to Apple. Did you buy more than $600 worth of office products this year? Better prepare that 1099 for Staples.

This little gimmick is aimed at raising $2 billion in revenue to help pay for the new health care mandate.

But according to the National Small Business Association, the average business will have to file 85 1099s as a result of this new policy – nearly 9 times the current average of around 10 forms.

There were two amendments proposed in the Senate that would’ve changed the 1099 provision. One was an attempt to raise the threshold from $600 to $5,000 and exempt all businesses with less than 25 employees. That amendment failed, as did a separate amendment to repeal the provision entirely.

Sadly, these amendments seemed to fail because the Senators are trying to make up the $2 billion in revenue needed for the health care bill. So in each amendment, they tried to find the money from elsewhere – and those lobbyists were powerful enough to swing the vote in their favor.

Even President Obama has come out in favor of repealing this 1099 provision. This begs the question – did he even read the bill before he signed it? How come he didn’t know about this 1099 provision before he made it law in such ceremonial fashion back in March?

Remember, as Speaker Nancy Pelosi said, “But we have to pass the bill so that you can find out what is in it.”

Perhaps she was right. After all, you have to open your Christmas present before you can find out what it is. Too bad Obamacare continues to be one giant lump of coal after another.

Written by Geoff Pallay

September 21, 2010 at 8:26 am

Education and Economics: Lessons from ‘Unleashing Capitalism’

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Declining performance by our schools – as reflected in falling SAT scores – doesn’t just fail our students – it also fails our economy and our prospects for long-term economic growth.

From Unleashing Capitalism:

Among the most important building blocks for future economic growth is educational reform. An important part of South Carolina’s future lies in the hands of its students, and it is vital that they be adequately prepared to be diverse in the type of labor they can offer and be flexible as the needs of the economy change. It is well known by economists that investment in human capital is a major component of economic well-being, yet current investments in South Carolina’s education system do not appear to be paying off.

Students seem to be unprepared for many types of labor, suggesting some defect in the educational system that is failing to prepare them to be adaptive in their future endeavors. Many individuals in South Carolina are ill-prepared to face changing economic conditions and lack the necessary skills to successfully adapt.

Written by Robert Appel

September 14, 2010 at 4:00 pm

Posted in Capitalism, Economics

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