ART WOOLF

Free Press columnist

Vermont's move to a single payer health care system moved a bit closer to reality — or at least a realistic assessment — last week when some people in the know leaked part of the proposed financing mechanism to the media.

That part is an 8 percent payroll tax on all Vermont employers. A small business with 10 employees, each of whom earns $50,000, would pay a health care payroll tax of $4,000 per employee, for a total tax of $40,000.

How that tax will affect businesses or employees is difficult to assess — as is everything else about the single payer plan. It depends on how much the employer (and employees) currently pay for health insurance premiums, how that compares to the taxes each will pay for the new single payer plan, and how the current benefits package compares with what the single payer plan will offer. None of those details have been made public yet.

The health care payroll tax is estimated to bring in about $1 billion, which is just enough to pay for half the cost of the single payer plan.

Where will the other half come from? The simplest source would be the same 8 percent payroll tax levied on employees. That's how the Social Security tax works — split evenly between employees and employers.

At least that's who sends the money to the Social Security system. Economists agree that in reality, the economic cost of Social Security is paid entirely by the employee. And the Vermont employer payroll tax will also ultimately come out of workers' paychecks.

Financing Vermont's single payer health care system entirely through payroll taxes would mean a very large payroll tax — more than we now pay in Social Security taxes. That's not acceptable to single payer advocates, who want to get a lot of the funding from wealthy Vermonters, which means using the income tax.

Simple arithmetic tells us that in order to raise $1 billion for health care, the state would need to raise 150 percent of what it now raises through the income tax. And that's on top of the current income tax. The table estimates what that would mean for workers and taxpayers at a variety of income levels.

Vermonters earn about $13 billion in wage income. But our total income is $4 billion higher than that at, about $17 billion. An income tax can capture some of that $4 billion. The payroll tax can't. And a large share of that $4 billion is earned by a small number of upper income Vermonters.

Eight thousand Vermont families earn more than $200,000 and pay 40 percent of all the money the state collects from the income tax. They will probably be required to pay at least 40 percent of the new income taxes, and likely more, needed for the new state health insurance program.

A high income Vermont taxpayer currently faces a top state marginal income tax rate of 8.95 percent and an average tax rate of at least 6 percent. If my estimates are correct, or even close, if these taxes are enacted high income Vermonters will be paying about 15 percent of their income to the state and face a marginal tax rate in the high teens. No other state even comes close to those levels.

Can Vermont, its economy, and its people, afford a single payer health care system? That's the question that the legislature will be debating starting in January.

Art Woolf is associate professor of economics at UVM.