Shumlin Wants $90 Million Payroll Tax To Fund Health Care Reforms

Jan 15, 2015

Less than a month after shelving his plan to make Vermont the first state in the nation with a single-payer health care system, Gov. Peter Shumlin used his budget address today to restore his credentials as a committed proponent of serious health care reform.

A new payroll tax on all businesses that would raise more than $90 million annually has emerged as the centerpiece of a financing reform proposal that aims to redistribute costs within the medical system.

The bulk of the new revenue will be used to increase reimbursement rates to providers that treat people on Medicaid. And since increases in Medicaid rates will enable a dollar-for-dollar reduction in private insurance rates, Shumlin says the 0.7-percent payroll tax will at the very least be cost-neutral to businesses currently providing health benefits to their employees. 

The new payroll tax surcharge would raise $41 million for the first six months of 2016, but $90 million on an annualized basis. 

Read the full text of Gov. Shumlin's budget address here.

The central part of Shumlin's plan is aimed at reducing what's known as the Medicaid cost shift. Because Medicaid reimburses providers at between 40 and 60 percent of the service, the remaining balance is shifted over to private health insurance premiums. It's estimated that between 15 and 20 percent of the cost of private premiums are the result of this shift.

“Every dollar of this increased payment in Medicaid reimbursement rates will be used to reduce the cost shift and bring down private insurance rates,” Shumlin said. 

However, the financial impacts of the payroll tax will be heavier on the Vermont businesses that don’t contribute to their employees’ health benefits. For those companies – and that’s the majority of businesses in Vermont – the plan would increase the cost of doing business without offering offsets.

Shumlin says increasing Medicaid reimbursement rates offers such a high-value benefit that Vermont would be fiscally irresponsible not to take advantage of the federal match.

The surprise call for a new payroll tax overshadowed what had been the biggest issue heading into the governor's fiscal year 2016 budget address: the $94 million shortfall between projected costs for general government, and the revenues coming in to pay for it.

“Current Medicaid reimbursement rates drive up private insurance costs for businesses and individuals, acting as a hidden tax… (that) amounts to an astonishing $150 million in private premium inflation every single year,” Shumlin said. “Our failure to fix this by increasing state Medicaid reimbursements also means we are failing to draw down tens of millions in dollars available in matching federal funds.”

The federal government provides about $1.10 in match money for every $1 the state spends on Medicaid. That means the $90 million Vermont raises annually through the payroll tax would generate an additional $100 million or so in federal money.

Only about two-thirds of the new state and federal revenue will go to increase Medicaid reimbursement rates, however. The remainder will be used to fund ongoing health care reform initiatives, as well as to provide financial assistance to working-class Vermonters now required to purchase their health insurance through the new online exchange.

Shumlin’s budget calls for $4 million in premium assistance to the exchange population – double the assistance available now. The proposal also would use $4.5 million to increase payments to doctors and other providers that participate in what’s known as the Blueprint for Health. The eight-year-old program aims to drive down health care costs by creating “medical teams” that prove better oversight of patients.

Shumlin has proposed a "balanced" approach that uses a combination of new revenues, cuts, and the use of one-time money to close the fiscal gap.
Credit Taylor Dobbs / VPR

“These are things that really make real differences in the quality of care and in improving outcomes,” Health Care Reform Chief Lawrence Miller says. “And it’s a big, big step.”

A key provision of the Shumlin proposal, according to Miller, is that the new payroll tax revenue will be placed in a “State Health Care Resources Fund” that will not be used to solve budgetary pressures in general government.

If the business community has assurances that the money will be used only to lower the cost of health care, Miller says, they’ll be more like to support the concept.

“And (the payroll tax) isn’t 0.5 percent and it’s not 1 percent for a reason. We were trying to make sure we were getting the policy outcome we were after in terms of the cost-shift reduction, and these other very specific enhancements that we need.”

Aiming For A Balanced Budget

The surprise call for a new payroll tax overshadowed what had been the biggest issue heading into the governor’s fiscal year 2016 budget address: the $94 million shortfall between projected costs for general government, and the revenues coming in to pay for it.

Shumlin has proposed a “balanced” approach that uses a combination of new revenues, cuts, and the use of one-time money to close the fiscal gap.

To eliminate the state's projected $100 million budget gap, Shumlin proposed a package of budget cuts and new tax revenue. He says the cuts will largely be made by consolidating a number of programs. The new revenue will be raised by eliminating an income tax provision that allows people to deduct state and local taxes that they paid in the previous year. It will affect the roughly 30 percent of taxpayers who itemize their deductions:

"The average benefit for those who use this deduction is $175," Shumlin said. "Eliminating it raises $15.5 million for our budget gap. This is a progressive and principled approach it's the right thing to do, it's timely and sensible."  

"If you really want to make a mess of our school system, ask Montpelier to come up with a one-size-fits-all solution of central control." - Gov. Shumlin

The plan would also generate revenue by revising the Current Use property tax program in such a way that would increase tax payments from many farms.

The cuts include about $20 million in reductions at the Agency of Human Services, most of which stems from a $6.7 million cut to a fund that provides heating assistance to poor Vermonters during winter.

The proposal also cuts funding for the Community High School of Vermont by $1.7 million, money the governor says will come from a restructuring plan that will close field offices at the school, which serves teenagers in the corrections system.

‘Sprinkled’ Cuts

Administration Secretary Justin Johnson says the majority of the cuts at AHS will be in small amounts “sprinkled out throughout state government.”

Shumlin is asking for another $20 million in cuts outside the Agency of Human Services, a quarter of which would come from as-yet-unidentified cuts to state payroll. Johnson says the administration will negotiate precisely how to accomplish those savings with the union that represents state workers. But the cuts would have to involve either a reduction in the number of people the state employs, or the value of their compensation packages.

Proposed cuts would also include:

  • $700,000 to a Working Lands Program that offers cash grants to agriculture entrepreneurs
  • $800,000 to Vermont Interactive Technologies, effectively wiping away state support for the statewide videoconferencing program
  • $500,000 to state libraries
  • $1.7 million to emergency dispatch services

Education Financing

Shumlin did not offer a specific plan to reduce education property taxes,  saying now is not the time to make drastic changes in the current funding formula. Instead he called for a state-local partnership to find ways to lower costs and increase educational quality. But he said the state would be ready to step in if these goals are not achieved at the local level.

"We should either adjust the funding formula to ensure that other taxpayers don't support continued bad choices or when absolutely necessary find ways to exercise authority to close those schools," he said.  

Shumlin also called for a ban on teachers' strikes and a prohibition on local school boards from imposing the terms of a contract.

While some legislators – including House Speaker Shap Smith – have called for overarching reforms to education governance or finance, Shumlin avoided that approach in his speech.

Sen. Claire Ayer, center, D-Addison, reacts during Gov. Peter Shumlin's budget address.
Credit Andy Duback / AP

“If you really want to make a mess of our school system, ask Montpelier to come up with a one-size-fits-all solution of central control,” Shumlin said. “Every time we try to solve the big problems in education by ourselves under this dome, we run into a reality roadblock: every school, every district, and every community and region in our state is different and faces unique challenges that require unique solutions.”

First on Shumlin’s list of proposals to address rising property taxes: gather more data on the problem. He says the Agency of Education today launched “online tools” designed “to help communities understand their education spending.”

Shumlin also called for a moratorium on new state laws that add costs to school districts; the elimination of financial grants that help keep small schools afloat; and financial aid to districts that need to pay for upfront capital costs in order to merge with other districts.

Shumlin said his proposals will no doubt have its detractors, however he said “even more drastic solutions may be demanded by Vermonters if we fail to act.”

Update 6:30 p.m. This post has been updated to include additional reporting.

[View the story "Gov. Peter Shumlin's 2015 Budget Address" on Storify]