How New York’s Single Payer Health Care Bill Affects the Working Poor

Executive Summary

In New York state, efforts to abolish private health insurance and enact a single payer, government-run health care system have steadily advanced. In November 2020, Democrats gained a two-thirds, veto-proof majority in both chambers of the New York state legislature, raising hopes that a single payer bill called the New York Health Act is close to passage.

In 2017, we analyzed an earlier version of the New York Health Act, concluding that it “would require approximately $226 billion in new tax revenue per year, nearly quadrupling the state’s tax burden and leading, at minimum, to the loss of 175,000 jobs, as high-wage, high-value industries move to neighboring states,” adding that “these losses would filter throughout the economy through lower consumer spending, reducing economic opportunity for those who most need it.”

The following year, a group of researchers at the RAND Corporation published an optimistic analysis of the New York Health Act, concluding that the bill would increase employment by 2 percent over a 10 year period, even though the Act would require, in their estimation, approximately $1.7 trillion in new state taxes between 2022 and 2031, tripling the state’s tax burden.

The RAND analysis is thorough in some ways, but is based on numerous flawed assumptions, and its optimistic projections fail to account for several critical economic and legal considerations:

• Negative impact of tax increases on economic growth. The RAND authors assume that economic growth in New York state from 2022–2031 will be identical to that from 1997–2017, despite their estimates that the state’s tax burden will triple. Lower economic growth means fewer jobs and slower wage growth for lower-income workers.
• Out-migration of high earners, imposing a higher tax burden on those who remain. The New York Health Act mandates a new, progressive surtax on all New York residents. The RAND authors model this surtax as increasing payroll and non-payroll tax rates by 18.6% and 18.7%, respectively, on New Yorkers earning more than $141,200. For their core estimates, the RAND authors assume that none of these high earners will leave the state. But if 0.5% of New York filers do leave, “the marginal tax rates [for those who remain] would need to increase from 6.2, 12.4, and 18.6 percent to about 29.5, 58.9, and 88.4 percent” in order to make up the shortfall in revenue. These taxes would be on top of existing federal, state, and local taxes, meaning that New York City residents earning more than $141,200 would face capital gains tax rates exceeding 100 percent. “Any reduction of tax collections from the highest-income filers would require higher taxes on lower- and middle-income filers,” the RAND authors acknowledge.

• Inability to deduct state and local tax increases. The RAND authors assume that NYHA taxes will be deductible from federal income taxes; however, current law limits such deductions to $10,000 in state and local tax liabilities (the “SALT tax”). This problem compounds the one above, especially for middle- and high-earners.
• Illegality of banning Medicare Advantage and ERISA plans. 7 million New York residents are enrolled in either Medicare Advantage plans issued by private insurers, or enrolled in plans sponsored by self-insured employers that are protected from state interference by the Employee Retirement Income Security Act (ERISA). The New York Health Act contemplates banning such plans, which is not possible under federal law, rendering much of the NYHA unworkable. Nonetheless, the RAND authors insist that such bans are in fact feasible, and that the outcome of likely litigation against such bans is “far from clear.” The NYHA also depends on federal waivers to convert the state’s Medicaid program into a single-payer version, which inherently depends on presidential administrations being uniformly supportive of single payer health care.

The flawed design of the New York Health Act would be felt most acutely by the working poor: individuals below 200% of the Federal Poverty Level who already have heavily subsidized health insurance through either Medicaid or the Affordable Care Act, and yet would face NYHA non-payroll surtaxes of between 6.2% and 29.5%, depending on the level of out-migration of high earners.

The RAND authors estimate that even in the optimistic scenario in which no one leaves the state, nearly half of those earning less than 139% of the Federal Poverty Level—about $17,900 for a childless adult and $36,800 for a family of four—would pay more for health care under the New York Health Act. Under the outmigration scenario, the proportion of those in this income bracket paying more would increase. However, RAND did not model the distributional effects of these scenarios.

In addition, we estimate that the New York Health Act would lead more than 315,000 jobs to leave New York: 50,000 related to health insurance; 110,000 in financial services; 125,000 in other high-income professions; and 30,000 in the leisure and hospitality industry.

Even if we take as given the RAND authors’ optimistic projections of slower growth in health care costs under the New York Health Act, the bill would be immensely destructive to the state’s core economic sectors, and significantly reduce take-home pay and employment opportunities for lower-income New Yorkers.

Fortunately, there are other ways to reduce the cost of health care and increase insurance coverage, which we have described in detail elsewhere.

Introduction

The high cost of U.S. health care remains one of the greatest long-term threats to American living standards. One commonly proposed response to this problem is single payer health care: the abolition of private health insurance, replaced by a single, state-run bureau in which the government regulates health care prices and restricts access to costly care.

One epicenter of the U.S. single payer health care debate is Albany, New York, where a single payer bill called the New York Health Act was first introduced by State Assemblyman Richard Gottfried in 1992.

Mr. Gottfried and his allies have on several occasions passed the New York Health Act out of the New York Assembly—the legislature’s lower chamber—but have failed to advance the bill through the state Senate, which has been under Republican control for most of the period since World War II.

In 2020, however, Democrats gained a two-thirds, veto-proof majority in the State Senate to go along with their similar two-thirds majority in the Assembly. These electoral victories have raised hopes among Democrats that the New York Health Act is closer to passage than it has ever been before.

In 2017, we analyzed that year’s version of the Act and estimated that by 2019, if enacted, the bill would require a nearly four-fold increase in state taxes—$226 billion in 2019 alone—and “leading, at minimum, to the loss of 175,000 jobs, as high-wage, high-value industries move to neighboring states.”

The RAND Corporation’s analysis of the New York Health Act

In 2018, a group of researchers at the RAND Corporation—Jodi Liu, Chapin White, Sarah Nowak, Asa Wilks, Jamie Ryan, and Christine Eibner—published an optimistic analysis of the New York Health Act, concluding that the bill would increase employment by 2 percent over a 10 year period, even though the Act would require, in their estimation, approximately $1.7 trillion in new state taxes between 2022 and 2031, tripling the state’s tax burden.

Importantly, because health care spending typically grows at faster rates than other forms of spending, the RAND researchers project that the New York Health Act’s tax burden will grow at 4.7% per year from 2022 to 2031, compared to 3.6% per year for the state’s pre-existing revenue streams.

Combined with President Biden’s proposed doubling of the capital gains tax rate, the 18.6% New York Health Act surtax on non-wage income modeled by RAND would lead to a 75.5% combined federal and state capital gains rate for high earners in New York City. It is difficult to envision many of those high earners remaining in New York under such a regime.

The RAND authors have performed some useful calculations that we will explore below. Nonetheless, while the RAND researchers describe their work as “unbiased,” they explicitly declined to take into account numerous factors that would have painted a much less flattering picture of the New York Health Act. These include:

Negative impact of tax increases on economic growth. The authors assume that economic growth in New York state from 2022–2031 will be identical to that from 1997–2017, despite their estimates that the state’s tax burden will triple. It is far likelier that New York’s economic growth will slow, or even decline, in particular because a large increase in the state’s capital gains tax rate will lead financial institutions to depart for other states. This is because the New York Health Act specifies that the taxes it imposes are progressive; i.e., they disproportionately fall upon high earners, even though the cost of health insurance does not really vary by income.

Out-migration of high earners, imposing a higher tax burden on those who remain. The COVID-19 pandemic has led many high-income workers to realize that they can work remotely, from low-tax jurisdictions. Nonetheless, the New York Health Act would impose new, progressively graduated taxes on payroll income and non-payroll income, such as dividends and capital gains.

The RAND authors modeled this scheme in 2022 as applying an 18.3% surtax on wage income and an 18.6% surtax on non-wage income for New Yorkers earning more than $141,200. This means that high earners in New York City would pay capital gains tax rate of 55.9%.

Combined with President Biden’s proposed doubling of the federal capital gains tax rate, and a recent agreement to raise New York state’s top rate to 9.65%, the NYHA surtax modeled by RAND would lead to a 75.5% combined federal and state capital gains rate for high earners in New York City. It is difficult to envision many of those high earners remaining in New York under such a regime. Many of them could easily relocate to low-tax states like Florida and Texas, or even nearby locales like New Jersey and Connecticut.

While the authors acknowledge that “new taxes to support NYH fall disproportionately on a small share of the population,” they “assumed that…there is no migration of workers and businesses” in their baseline projections. This is a notable omission, given that the authors actually performed an analysis indicating that if 49,400 high earners left the state, the state would lose $33.5 billion in revenue. “The marginal tax rates [for New Yorkers who remain] would need to increase from 6.2, 12.4, and 18.6 percent to about 29.5, 58.9, and 88.4 percent” in order to make up the shortfall.

Adding in existing federal, state, and local taxes, New York City residents earning more than $140,000 per year would face a capital gains tax rate of over 100 percent under this scenario. As the RAND authors note, “even a small tax migration or avoidance effect could influence the state’s ability to finance the program.”

In-migration of undocumented immigrants and other uninsured individuals. The New York Health Act would provide taxpayer-funded health care to all New York residents, including undocumented immigrants, “without regard to the individual’s immigration status.” The RAND authors assert that “there is little evidence to suggest that families would move to New York to take advantage of universal health care.”

But explicitly providing state-funded health insurance with nearly zero cost sharing to undocumented immigrants would be an unprecedented expansion of health care subsidies, and would almost certainly attract such immigrants and possibly other uninsured individuals. Under the latest version of the New York Health Act, its subsidized health coverage would apply not only to New York residents, but also people who work in New York but live elsewhere.

Inability to deduct state and local tax increases. Current federal tax law limits the federal deductibility of state and local taxes to $10,000 per year: the so-called “SALT deduction.” Nonetheless, the RAND authors assume that the New York Health Act’s payroll taxes would be “excluded from workers’ taxable income.”

This would only be true for New Yorkers whose state and local tax burden, inclusive of the NYHA, remained under $10,000 per year. However, for most people, especially moderate-to-high earners, the NYHA’s payroll taxes would not be deductible from federal taxes.

For these individuals, the NYHA would be replacing a tax-excluded benefit—employer-sponsored health insurance—with non-deductible taxes on wage and non-wage income. This change amounts to a significant tax increase on all of those whose state and local taxes exceed the $10,000 threshold.

Illegality of banning Medicare Advantage. In 2019, 41 percent of New York’s Medicare population—1.5 million residents—were enrolled in Medicare Advantage plans issued by private insurers. The New York Health Act seeks to abolish these plans and force the state’s Medicare Advantage enrollees to enroll in a single-payer version of Medicare.

As we noted in 2017, however, “states do not have the authority to abolish privately-administered Medicare Advantage plans, nor to pool Medicare funds into a state-run Trust Fund.” Medicare benefits belong to the Medicare beneficiary, not to the state where the beneficiary resides. Federal law prohibits states from imposing “any condition [on Medicare Advantage plans] that CMS does not determine to be a licensure requirement.”

Illegality of banning ERISA plans. In 2019, 5.4 million New Yorkers—one-quarter of the state’s population—were enrolled in self-insured plans protected from state interference by the Employee Retirement Income Security Act (ERISA). The share of New Yorkers with employer-sponsored insurance enrolled in ERISA plans increased to 57.5 percent in 2019 from 53.5 percent in 2015.

ERISA explicitly preempts state health insurance laws when employers choose to pay for their workers’ health care expenses directly, instead of through a third-party insurer. In other words, ERISA prevents New York State from abolishing private health coverage sponsored by companies that self-insure their workers.

This principle of preemption was upheld by the U.S. Supreme Court on March 1, 2016 in Gobeille v. Liberty Mutual. The State of Vermont had sought to require self-insured employer plans in that state to report data on health care utilization, pricing, and quality to the state government. The Supreme Court ruled that ERISA prohibited states from regulating self-insured employer plans, even with something as minor as data disclosure.

Nonetheless, the RAND authors argue that ERISA court rulings are “far from clear,” and that it would be possible for New York to ban self-insured plans: a claim that is impossible to square with the statutory text of ERISA and the case law it has accumulated. Put simply: the entire purpose of ERISA is to preclude states from regulating self-insured plans, let alone abolishing them.

Instability of Medicaid waivers. The New York Health Act also depends on the federal government granting the state waivers to deploy its federal Medicaid matching funds for a single payer health care system. While such waivers are conceivably feasible under a presidential administration that is philosophically friendly to single payer health care, they would not be renewed by Republican administrations. Given the foundational role that Medicaid funding plays in the New York Health Act’s architecture, such instability alone makes the policy unworkable.

The RAND authors estimate that nearly half of New Yorkers earning less than 139% of the Federal Poverty Level — about $17,900 for a childless adult and $36,800 for a family of four — would pay more for health care, inclusive of taxes, under the New York Health Act.

A majority of the working poor would face higher taxes

As discussed above, because the New York Health Act mandates a progressive tax to fund new health care spending, the RAND researchers modeled a NYHA surtax with the following rates in 2022 and 2031:

• Income ≤ $27,500: NYHA payroll tax on wage income of 6.1% in 2022 and 6.7% in 2031; NYHA non-payroll tax on dividends, interest, and capital gains of 6.2% in 2022 and 2031.
• Income between $27,500 and $141, 200: NYHA payroll tax of 12.2% in 2022 and 13.4% in 2031; NYHA non-payroll tax of 12.4% in 2022 and 12.5% in 2031.
• Income above $141,200: NYHA payroll tax of 18.3% in 2022 and 20.0% in 2031; NYHA non-payroll tax of 18.6% in 2022 and 18.7% in 2022.

Note that individuals with income below $27,500 would face a significant tax increase, in many cases without a concomitant improvement in health benefits. For example, an individual making $17,000 a year is eligible for Medicaid today, with little to no cost sharing by the individual. Nonetheless, if that individual lives in New York, under the New York Health Act he or she would face a 6.1% tax increase on all wage income, and a 6.2% increase on non-wage income.

As a result, in many cases, the NYHA’s tax increases would not be offset by reduced spending on health care. Indeed, the RAND authors estimate that nearly half of New Yorkers earning less than 139% of the Federal Poverty Level—about $17,900 for a childless adult and $36,800 for a family of four—would pay more for health care, inclusive of taxes, under the New York Health Act.

Importantly, as discussed above, if 0.5% of high-earning New Yorkers leave the state, the RAND authors project that the non-payroll tax rate for those earning less than $27,500 would skyrocket from 6.2% to 29.5%.

The RAND authors also underestimate the proportion of people facing higher costs, and overestimate the proportion of people facing lower costs, because they assume that New York residents will be able to deduct the NYHA’s tax increases from their federal tax return. As noted above, under current law, state and local tax liabilities above $10,000 are not deductible from federal taxes.

RAND did not model the distributional impact of these scenarios, but it is likely that at least half of New Yorkers in this income bracket would face higher costs under the NYHA than under the status quo ante.

The RAND authors did examine an alternate NYHA tax schedule, in which filers with less than $27,500 in income were exempt from the Act’s surtaxes. However, in this scenario, filers with incomes above $141,200 would pay significantly more in taxes, with the NYHA payroll tax increasing to 25.6% for these filers, and the non-payroll tax increasing to 22.4%. Middle-earners would also pay more in payroll taxes (12.8% vs. 12.2%), and less in non-payroll taxes (11.1% vs. 12.4%) under this scenario.

While this alternate scenario has the benefit of sparing the working poor from tax increases, it would accelerate the out-migration of high earners to other states. As the RAND authors note, “the tax schedule is critical to the viability of the program—in terms of minimizing tax avoidance and migration.”

NYHA impact on middle- to low-income homeowners

The NYHA’s substantial increases in non-payroll taxes, including dividends, interest, and capital gains, will dramatically affect New York homeowners, especially those for whom their homes are their primary source of wealth. On paper, home price appreciation appears like a capital gain when a family sells its home to move somewhere else. However, if that family has owned that home for 10 years, a significant amount of those paper gains are actually accounted for by inflation. In addition, families pay property taxes on their homes. The New York Health Act’s non-payroll taxes would apply to primary home sales, substantially increasing costs for middle- and low-income homeowning households, and depressing real estate values, as fewer people seek to live in New York.

NYHA impact on municipal bonds & local fiscal policy

The NYHA’s non-payroll taxes would apply to all non-payroll income, including dividends, interest, and capital gains. Under current law, interest from bonds offered by local governmental institutions, like states, cities, and public hospitals, are exempt from federal, state, and local taxes. Under the NYHA, interest from these bonds would be taxable for New York residents. Investment funds with significant bond portfolios would almost certainly leave the state in response to this tax disincentive.

NYHA tax increases would expand over time

As discussed above, under the RAND authors’ modeling of the New York Health Act, the NYHA’s tax increases will expand over time. This is because the state’s health care costs will grow faster than the state’s tax revenues, even if high earners remained in New York: a highly unlikely outcome. This means that the proportion of New York residents who are paying more under the NYHA than they were before will also increase.

315,000 job losses under the New York Health Act

The RAND authors estimates that the New York Health Act would lead to a “nearly 2-percent increase in employment under the NYHA compared with the status quo, due to changes in the health care services and insurance sectors and changes in health care payments leading to changes in household disposable income.” An increase in employment under the NYHA is highly improbable, for reasons described earlier in this paper, and also in our previous paper on the topic, The Price of Single Payer Health Care in New York.

In contrast to the RAND authors, we estimate that the New York Health Act will reduce employment in New York state by 315,000:

• Health insurance industry. The NYHA, by design, would abolish the state’s health insurance industry. If the Act were to succeed in doing so, it would eliminate approximately 50,000 jobs.
• Financial services. As of March 2021, 194,100 New Yorkers are employed in the securities, commodity contracts, investment banking, and brokerage industries. Another 171,400 are employed in credit intermediation and related activities, for a total of 365,500 workers. According to the New York State Comptroller, the average salary—including bonuses—of securities industries workers in New York City was $406,700 in 2019, “five times higher than the average in the rest of the private sector,” representing 18 percent of New York State’s tax collections. But commuters represented 41 percent of all industry employees, a number that would increase under the NYHA. The COVID-19 pandemic has demonstrated that workers now have the technology to work remotely; under the NYHA’s punitive tax regime, many no doubt will. We estimate that 30 percent of these workers, or 110,000, will leave the state under the NYHA.
• Other high-income professions. 1.25 million New Yorkers were employed in non-financial professional and business services, such as accounting, architecture, technology, and advertising. Many of these jobs could relocate to friendlier tax climates, for similar reasons to the financial sector. We estimate that 10 percent of these workers, or 125,000, will leave the state under the NYHA.
• Restaurants and hospitality. The New York leisure and hospitality industry is geared to the financial services industry, and employs 593,900 New Yorkers. We estimate that 5 percent of these workers, or 30,000, leave the state under the NYHA.
• Other economic effects. As the RAND authors note, the availability of greater health care subsidies for unemployed individuals may lead some to voluntarily forego employment. Other job losses will occur if high-wage sectors leave the state. We do not model these effects, but they would ultimately affect millions of low- and middle-income earners in New York.

Alternative approaches to improving health care affordability

Fortunately, the substantial economic and fiscal disruption that the New York Health Act would cause is not necessary to make health care and coverage more affordable for more New Yorkers. Three-fourths of uninsured legal U.S. residents are already eligible for some form of subsidized coverage. In New York, the proportion is even greater, because the state has drawn funds from the Affordable Care Act’s Medicaid expansion.

For most of the remaining uninsured, the problem is not the absence of subsidies. The problem is the high underlying cost of health care.

The principal driver of unaffordable health care is unaffordable prices charged by the providers of health care goods and services such as prescription drugs and hospital care.

New York could make a proactive effort to rein in hospital prices through stronger antitrust enforcement, greater transparency, and by highlighting exploitative pricing practices by health care providers. New York could learn from the private Medicare Advantage program, by capping monopoly providers’ prices at those of Medicare’s. The state could reform the significant flaws in the way it regulates non-group health insurance, for example by eliminating the requirement that carriers offer similar prices to any enrollees, regardless of their age.

Universal coverage is a goal that every New York can embrace. But the best health care systems around the world, like those of Switzerland, Germany, and the Netherlands, deploy private health insurers to deliver that coverage. New York would do well to learn how.