1---FISCAL INCENTIVES----corporations save a ton of cash from the CP, so they would defend the CP and stop ERISA challenges

Unable to directly regulate most employer-sponsored health plans, state based reform plans tie themselves in knots trying to work around it. Most state single-player plans would indirectly but strongly encourage companies to drop insurance benefits and increase wages to make up for it.

Vermont considered funding their plan with a payroll tax because payroll contributions are deductible business expenses.

“This financing mechanism would best preserve the roughly $500 million worth of forgone federal income taxes owing to the current tax treatment of employer-sponsored health insurance,” one report argued.

Theoretically, over the long term this should mostly even out, but “mostly” is not a reassuring political qualifier. The interplay could create some real losers, especially in the short term.

How About A State Payroll Or Sales Tax To Fund Single-Payer?

It is not guaranteed a payroll tax-financed universal health care system would survive an ERISA challenge.

The Rand study for Oregon points out, “Because the single-payer option would provide universal coverage and use payroll taxes to help fund the system, self-funded employers operating in Oregon could argue that the option effectively compels them to discontinue their current health plans and offer alternative benefits.”

“Unless the state were able to obtain a federal exemption from ERISA, the single-payer option would very likely be challenged in court by self-funded employers,” the study adds.

The report indicates a sales tax-financed system might have better legal standing but even that could run afoul. The sales tax route creates the additional problem of how to recoup the money lost due to the federal tax exempt status of employer provided insurance.

To understand why let’s assume that if a state created a single-payer system, most companies would stop compensating their employees by giving them private insurance benefits.

Let’s also assume that instead of partly compensating employees with insurance they would just pay them higher wages. The problem is that, unlike insurance benefits which are tax exempt, these higher wages would be subject to federal tax.

Workers in this state would be sending way more to the federal government, even though their total compensation would not have increased. Getting the federal government to fix this or reimburse the state would be a challenge.

Dealing With The Federal Straitjacket

If activists want to make states their focus in the effort to move toward single-payer, they need to address the legal constraints in addition to the political ones. For example, the state of California is considering a single-payer bill. The plan for running the actual insurance system is sound, but the legislators behind the measure still haven’t figured out how to fund it, which is difficult given constraints created by federal law.

There are three basic options to deal with these constraints:

1) Build a broad base of support in a state where the political establishment is willing to stomach large transitional costs and possible lost revenue for a law that could be undermined by the Supreme Court. This was tried in Vermont but it hasn’t worked yet, although it might in a larger state with a big tax base.

2) Try making a deal with the devil. There is a small chance a bipartisan Congressional deal could be reached to give states greater flexibility to pursue their own reform plans, including a waiver from ERISA. This would make state single-payer relatively easy. Any such deal while Republicans control Congress would likely give red states the flexibility to move in the wrong direction. States like Oklahoma would have the power to adopt some very regressive changes to their local health care system. The alternative is pushing federal law that would only waive ERISA for states pursuing single-payer.

3) Keep goals and proposals within the legal restrictions. It would be possible for states to greatly expand the use of public insurance without risking running afoul of ERISA. An all-carrot approach might convince companies to ditch private insurance.

Rand found Oregon could create a strong public option without a federal waiver. It would have lowered administrative costs and reimbursement rates, making it significantly cheaper than private insurance. If it was open to all companies, it is likely many employers would switch to it. It is not what many single-payer supporters want, but it is achievable in the short term. When most of the state is covered by public insurance, additional reforms become easier.