The Palmetto Insider

The blog of the South Carolina Policy Council

Posts Tagged ‘Taxes

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

Budget Crisis Long in Coming

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Despite all the rhetoric about budget cuts and employee furloughs, South Carolina’s FY10-2011 budget was the largest in state history. The total state budget was $21.149 billion. This includes: $8.268 billion in Federal Funds; $7.766 billion in Other Funds; and $5.115 billion in General Funds. That’s an increase of $500 million or 2.19 percent over last year. The increase comes mostly from increased fine and fee revenue and one-time federal stimulus dollars.

But this year’s budget increases are not an isolated phenomenon. Over the past 10 years:

  • The total state budget increased by 44.49 percent (FY2002 to FY2011).
  • The budget increased by 4.14 percent annually.
  • The budget increased every year, except one (FY2010).
  • In the five-year period (FY2003-FY2008) prior to the beginning of the current recession, the total budget increased 34.56 percent, going up by more than $5 billion.

According to the Mercatus Center, South Carolina’s state and local government spending relative to personal income is 26 percent – 5th highest in the country. In other words, local and state government spends 26 cents of every dollar earned by South Carolina’s people. Similarly, government spending accounts for 23 cents of every dollar of Gross State Product (GSP) – 4th highest in the country.

Debt is another serious problem. South Carolina government is carrying $40 billion in debt, including state, local, and school district debt, as well as unfunded liabilities on public employee pensions and post-retirement health benefits. State and local governmental outstanding debt accounts for 22 percent of GSP – again, 4th highest in the nation.

So we have high spending and high debt relative to income and GSP. What does that get us?

An unemployment rate of 11 percent – 6th highest in the nation (as of September 2010) and a median household income of $42,442, which is 42nd lowest in the nation (as of 2009). Our surrounding neighbors have unemployment rates of 9.6 percent (North Carolina), 8.9 percent (Alabama), 10 percent (Georgia), and 9.4 percent (Tennessee). A pretty uncompetitive situation for the Palmetto State.

It goes without saying that South Carolina is suffering from a budget and spending crisis – and it’s good to know governor-elect Haley recognizes this. But the crisis is not new. It comes from years of fiscal mismanagement and poor budgetary practices. None of these problems were addressed during the 2010 session. It’ll be interesting to see how legislators respond in 2011.

Written by SCPC

November 22, 2010 at 10:15 am

Federal Health Care Legislation: We Really Don’t Know What’s In It

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Everyone already knows the Patient Protection and Affordable Care Act, also known as Obamacare, is more than 2,000 pages long. (2,562 pages and 511,520 words when

both the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act are combined, notes Michael Tanner.)

But what isn’t publicized much is that through July 31, 2010, there were already 3,833 new pages of regulations added to the Federal Register directly relating to the new law’s implementation.

That means that a bill that was signed into law on March 30, 2010, generated almost 4,000 pages of new regulations in four months. 1,000 pages a month – and counting.

Here are some examples:

1)      Medicare: Updated rules regarding Medicare payments to hospitals. This 95-page section pertains to the policies and price levels for hospitals seeking reimbursement for Medicare patients. So instead of focusing on providing high quality of care to patients, hospitals must devote significant resources to reading and understanding these new rules.

2)      Hospice care: This rule, among other things, updates payment rates and capitalization requirements for hospice and home health agencies. The rule is 106 pages long.

3)      Electronic medical records (EMR): Most doctors will likely tell you that EMR improves patient care. It cuts down on paperwork, and reduces the likelihood of errors (ever heard of a doctor with good handwriting?). But this rule adopts standards, specifications, and certification criteria for health care facilities to implement EMR in their facilities. In other words, 153 pages of new regulations and rules to facilitate a process that is supposed to reduce compliance costs and paperwork. Huh? On top of that, the rule adds new regulations and requirements for offices that already have EMR. These early adapters now need to obtain government certification in order to receive reimbursements for Medicare/Medicaid. But what if the EMR system they have is already working fine? Why force them to switch? This rule could also stifle market innovation in this area by locking in all health care facilities to the module that the government requires.

No doubt, this is just the start of literally entire libraries of rules that are going to dictate everything from how much health care providers charge to how many x-ray machines are found in each hospital.

And we wonder why lawyers love Obamacare.

Written by Geoff Pallay

November 19, 2010 at 7:47 am

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

General Assembly Reaches Bottom of Slippery Slope

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If you’ve been keeping up with our new research on legislative control in South Carolina, you are well aware the General Assembly is attempting to direct the state’s economy by means of numerous boards and regulations, as well as by distributing billions of dollars in economic incentives and tax breaks to special interests. Consider:

  • The Legislature exercises extensive control over the state’s government and economy by means of 250-plus boards and commissions that regulate nearly every activity in the state.
  • The Legislature makes more than 420 appointments to executive branch boards and commissions – more than half as many as the governor makes.
  • The Speaker of the House and the Senate President Pro Tempore, combined, make more than 120 appointments to executive branch boards and commissions – 15 percent as many as the governor himself.

Two bills introduced in 2010 give a glimpse of how the legislative leadership controls and regulates the state’s economy by means of various licensing boards.

H 4235 would license and regulate talent agencies and create the South Carolina Board of Talent Agencies and Talent Agents to enforce these regulations. The new board would be made up of five members: two appointed by the Speaker of the House; two by the President Pro Tempore of the Senate; and one by the governor.

H 4624 would require musical therapists to be licensed and subject to oversight by the South Carolina Board of Music Therapy. The new board would be composed of five members: two appointed by the Speaker of the House; two by the President Pro Tempore of the Senate; and one by the governor.

First question: Do we really need the state to regulate talent agencies or musical therapists? This is not to marginalize these activities or to suggest that dishonest talent agents, for instance, can’t do a lot of harm. But is the state the best one to regulate these activities – and collect fees on them in the process? Or should instances of harm and abuse be addressed through tort law? And, if so, can the General Assembly instead do anything to facilitate the handling of such claims?

Second question: Do you think the General Assembly’s power is out of check? I mean, really … legislators don’t trust the governor to appoint boards related to talent agents and musical therapists?

Even if legislators stopped at wanting to control half of the appointments on every board and commission, we could speak of an imbalance of power between the legislative and executive branches. But to seek control over virtually all appointments to even such minor boards as these vividly illustrates that the Legislature really does think it is solely responsible for running South Carolina.

We could speak of a slippery slope … but clearly we’re already at the bottom.

Written by Jameson Taylor

November 17, 2010 at 2:29 pm

Posted in Economic Development

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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

Congress Set to Raise Utility Rates for South Carolina Consumers?

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We’ve written before on the General Assembly’s interest in adopting a renewable energy portfolio standard for South Carolina. In short, such a standard would mandate that a certain percentage of all electricity generated in South Carolina be derived from renewable energy sources, such as solar and wind.

In 2010, lawmakers introduced legislation (H 4241) that would have required government-run utilities to “develop standards for the promotion, encouragement, and expansion of the use of renewable energy resources in their service territories.” This is a first step toward mandating a renewable energy portfolio for the state.

This bill did not emerge from committee. But another threat to real energy independence – that is, energy choice – lies ahead. A bipartisan coalition has pledged to pass renewable energy standard (RES) legislation during Congress’ “lame-duck session” – that is, the remaining weeks of session after the November election (when few voters will be paying attention).

One such bill, introduced by Senator Jeff Bingaman (D-N.M.), would eventually require 15 percent of U.S. electricity to be generated from renewable energy sources.

Daren Bakst, director of Legal and Regulatory Studies at the John Locke Foundation of North Carolina, discusses the federal legislation here.

As Bakst cautions:

“Electric utilities won’t be the ones stuck with the higher costs imposed by an RES. Since these costs won’t be labeled in electricity bills, they will be hidden from electricity customers.

“An RES may not be as severe as an economy-wide cap and trade program for CO2, but that doesn’t change the fact that it’s an energy tax, created by forcing electricity customers to buy unreliable and costly renewable energy.”

Moreover, such a mandate would force states that have few renewable energy sources (read: South Carolina) to purchase energy from other renewable-energy-rich states, like Kansas and Iowa.  Writes Bakst:

“Many states do not have the same renewable energy resources as other states. To meet the renewable energy requirements in the Bingaman bill, electric utilities could purchase renewable energy across state lines. Those within a particular state, though, would likely never use this out of state electricity. For example, an electricity customer in Georgia would be subsidizing the electricity generation for people in Texas. …

“Moreover, there’s a reason why there’s only one state in the southeast (North Carolina) that has its own RES: southeastern states don’t have strong renewable energy resources. A federal mandate would act as a wealth transfer from southeastern states to states with strong renewable resources.

“Nine states and the Southeastern Association of Regulatory Utility Commissioners, sent a letter to Congress in 2007 opposing a federal renewable energy requirement, arguing:

“The reality is that not all states are fortunate enough to have abundant traditional renewable energy resources, such as wind … this is especially true in the Southeast and large parts of the Midwest.”

Concludes Bakst:

“An RES is a combination of bad elements of a cap and trade bill and ObamaCare. It’s an energy tax. It ignores state rights and forces Americans to buy something they don’t want. Even worse, a federal RES would fundamentally alter the underlying principle that utilities should be focused on using the lowest cost and most reliable sources of electricity. Common-sense electricity policy would be destroyed in favor of environmental extremism and self-interested politicians.”

Written by Jameson Taylor

October 13, 2010 at 10:39 am