Lawmakers Try Ending Tax On Benefits

August 29, 2003
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LANSING — Pumping up a new move to repeal state taxation of employee health benefits, a trade association says escalating health-care costs have become a serious threat to some manufacturers in Michigan and contribute to job losses.

Thirty-nine percent of the 700 manufacturers responding to the Michigan Manufacturers Association survey believe that rapidly rising health premiums now threaten their survival.

Containing health care costs is the top public policy issue for the survey's respondents, nearly a quarter of whom have trimmed their work force to offset the higher costs of providing health coverage to employees. Another 19 percent said they have scaled back hiring, and three-quarters expect to incur another year of double-digit rate increases in 2004.

MMA President John MacIlroy asserts that the industry is in a health care crisis.

"They want to provide health care, but they are running out of revenue to cover this increasing cost. Many are apparently resorting to layoffs or halting hiring to help cover health care cost hikes. That's a tragedy for manufacturers, workers and our state that must be addressed," MacIlroy said.

Among the association's ideas to address the crisis: eliminating provisions in the state's Single Business Tax that taxes health benefits.

That puts the MMA squarely on the side of Republican lawmakers who are again pushing the idea in Lansing.

Headed by Sen. Nancy Cassis, R-Novi, the legislative drive that started with the introduction of a package of bills last month in the state House and Senate would phase out the SBT's application to health benefits over five years.

Removing the SBT from health benefits has been tried repeatedly in the Legislature in past sessions but never gained the support needed to pass, even during the administration of former Gov. John Engler, who often touted the numerous tax cuts enacted under his watch. Yet Engler was never a fan of targeted tax cuts and instead pushed for the eventual complete elimination of the SBT.

Now, with double-digit annual increases the norm the last few years for heath premiums and no relief in sight, Cassis believes the political and business environment in Lansing is right to push through the repeal, even as the state continues to cope with a budget crisis and with the SBT already due to sunset at the end of 2009.

"We have a health care crisis on our hands," she said.

In 2003, employers in West Michigan saw their premiums rise an average of 12.4 percent, according to the annual survey of employer health plan costs conducted by the Alliance for Health and The Employers' Association in Grand Rapids. The increase represents all forms of health plans, all sizes of employers and the average rate hike incurred after employers adjusted their health plans to mitigate rising costs.

The increase came on top of average increases of 11.7 percent for 2002 and 12.8 percent for 2001 in the Grand Rapids area.

Nearly one-third of the manufacturers answering the MMA survey reported premium increases of 21 percent to 30 percent this year, and about half of the respondents said their premiums rose by 11 percent to 20 percent. Three-quarters of the respondents to the survey expect similar increases for 2004, which will undoubtedly result in the further curtailing of health benefits and shifting more of the cost to employees.

At the same time health premiums have skyrocketed, Michigan has been hit hard with a steady loss of manufacturing jobs over the years, particularly during the economic downturn of the past two years. In that light, backers of the legislative package are pitching it as an economic stimulus as well.

"Everything is aligned to make it work," Cassis said. "The timing is ripe."

Playing into the present environment, Cassis and other lawmakers had the bills drafted to phase out the SBT on health benefits, rather than follow failed past efforts that would have repealed it all at once.

The phase-out route they're taking should mitigate any significant one-time impact on the budget and enable the state to adjust accordingly, thereby eliminating that argument in opposition, Cassis said. Applying the SBT to health benefits generates only about $120 million annually for state coffers, she said.

Cassis, chairman of the Senate Finance Committee, could not say how much the SBT's repeal on health benefits would save employers on their overall cost of providing health coverage, although "every little bit helps." Her hope is that any savings employers incur will go to maintain existing health coverage or enable companies to make new investments in the business or hire additional personnel, providing a boost to the state's economy.

Charles Owens, state director of the Michigan chapter of the National Federation of Independent Businesses, doubts eliminating the SBT on health benefits will generate much cost savings to employers. But given the NFIB's overall disdain for the SBT, he's hopeful the legislative package can pass and will take any relief he can get for his members.

"It sends a message. It's as much philosophy as policy. You don't want to penalize people for providing health benefits," Owens said.

The legislative package has the "full support" of the Republican caucus, Cassis said, and has gained the eager support of business advocates and associations in Lansing such as MMA, NFIB, the Small Business Association of Michigan and the Michigan Chamber of Commerce.

"It just drives people nuts that we pay taxes on health benefits," said Chuck Hadden, vice president of government affairs for the MMA. "It's one of those things that doesn't make sense to business and until we get rid of it, it'll keep coming up."               

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