With a payroll tax on employers, we'd all be ailing

''IT'S A SHARED responsibility, employers must do their part" -- so goes the mantra in support of the proposal in the Massachusetts House of Representatives to impose a new 5 to 7 percent payroll tax on employers who don't provide health insurance to their workers.

While there is an element of truth to the slogan -- everyone should do his or her part to further the goal of meaningful healthcare reform -- the proposed payroll tax would have the opposite effect. Instead of expanding access to healthcare, it would risk the good work that has brought together many diverse groups on behalf of sustainable reform.

Massachusetts employers are already doing more to broaden healthcare access than employers in almost every other state, a point that proponents of the new payroll tax have tried to deny. In 2003, the most recent year for which national data are available, 66 percent of Massachusetts employers provided health benefits compared with 56 percent nationally -- placing Massachusetts at number three among the 50 states. Equally striking is the record of Massachusetts firms with fewer than 50 employees: Almost 60 percent of these smaller employers provided health coverage in 2003, compared with a little more than 40 percent for the nation.

The Massachusetts percentages have held steady for the last decade, even during the recent severe recession. While the number of employees who are accepting employer-provided coverage has declined, that is largely due to the skewed incentives created by an overly generous uncompensated care pool.

In reality, Massachusetts is in the enviable position of considering proposals to cover all the state's uninsured residents precisely because of the extraordinary efforts of the Commonwealth's employers, who collectively spend at least $12 billion on healthcare for their employees each year.

Setting all that aside, one might still argue that the payroll tax had merit if it helped accomplish the objectives of healthcare reform with no serious negative consequences. Unfortunately, the proposal has flaws that would undermine the goal of expanding access to the uninsured.

The tax would raise no new revenues for healthcare reform after taking into account the House's companion proposal to eliminate the existing surcharge on health plans and insurers to support the uncompensated care pool. While the House's economist originally estimated that the new tax would raise $650 million, analysis by the Massachusetts Taxpayers Foundation, based on state payroll data, concludes that the tax would produce only $175 million -- an amount that would vanish to almost nothing with the loss of the $160 million generated by the surcharge.

Other defects that would undermine the goals of reform:

The tax would create perverse financial incentives that would encourage some employers to drop their coverage because the cost of the tax would be significantly lower than the cost of providing insurance, thus undercutting the very employer-based system of healthcare that the tax is intended to enhance.

Imposing the tax as part of an attempt to mandate employer coverage would raise the total costs of providing universal coverage compared with a far-preferable individual mandate without the payroll tax. A recent study by the Urban Institute has shown that an individual mandate would increase employer coverage without imposing any new requirements on employers. With individuals required to have insurance, there would be greater pressure on employers to offer coverage as firms compete to attract workers.

The tax would place an added burden on the Massachusetts economy at a time when the state's job growth is badly trailing the nation. It would worsen the competitive disadvantages that firms operating in the Commonwealth already face as a result of some of the highest labor costs, health insurance premiums, energy costs, and unemployment insurance taxes in the nation. And it would affect small businesses most severely of all, many of which would almost certainly cut wages or reduce their workforce to afford the added costs of the tax.

When any one of these failings could deal a serious setback to the reform effort -- much less their totality -- in what way is it desirable, or even responsible, to impose this new tax?

Michael J. Widmer is president of the Massachusetts Taxpayers Foundation.