As the fifth-largest economy in the world, California has not only the infrastructure but also the political will to enact substantive policy reforms on a more accelerated schedule than the United States as a whole. Its status as a proving ground for sweeping progressive changes has both positive and negative aspects for companies doing business in California, but sometimes it can be hard to tell whether a new idea is a blessing or a curse. California’s current flirtation with universal statewide healthcare coverage personifies that uncertainty and is a legitimate cause for concern for any business operating in the state.
State General Assembly Leader Anthony Rendon pushed a proposal for statewide Universal Healthcare to the side last year. But instead of killing the idea, Rendon’s approach caused a political uproar, and Rendon finally capitulated by forming a Special Committee to explore the feasibility of enacting universal health coverage in the state. On February 5, 2018, the Assembly Select Committee on Health Care Delivery Systems and Universal Coverage issued a nineteen-page report of their findings.
Of the 93 percent of Californians who currently have healthcare coverage, Employer-Sponsored Insurance is the most common. Covering over 15 million people, this kind of insurance is provided by employers to employees, with both sides often sharing the cost of monthly insurance premiums.
The remainder of the population is covered by Medi-Cal (California’s Medicaid program), Medicare, and individual policies purchased through the California Health Benefit Exchange. There are also an estimated three million Californians without insurance of any kind; this number includes between one and two million undocumented immigrants who cannot apply for coverage because of their lack of legal status.
To put those numbers into perspective, the total cost of all healthcare expenditures in California for 2017-18 was approximately $400 billion, half of which comes from public sources including the federal, state, and local governments.
Employers who provide healthcare benefits to their employees receive an indirect tax benefit for employer-sponsored insurance by not treating the health insurance benefits employers offer their employees as taxable income to the employee. The estimated total tax benefit to businesses is somewhere between $40 billion and $50 billion annually; but to get the tax break, the employer has to pay for the employee’s healthcare coverage, which carries a huge price tag in and of itself. California employers spent between $100 billion and $150 billion on employer-sponsored insurance premiums in 2017-18, so while the tax benefit is welcome, the investment is a sizable one.
Under the proposed universal healthcare plan, nearly all Californians would be covered by a state-operated single-payer system. The most significant benefit to employers would be the elimination of co-pays, deductibles, and most importantly, employer contributions. Under this system, employers would no longer have to pay for healthcare coverage for their employees. This shift would not only dramatically reduce labor costs but could also level the playing field for small businesses competing with larger companies for talent.
Healthier employees at no cost to the employer- sounds great, right? It is, but as always, there’s a catch. In this case, there are about 200 billion catches, because the state will need to find $200 billion in annual revenue to finance the system.
The committee offered several options for generating the funding, including an increase of the Personal Income Tax ranging starting at 2.9 percent and increasing to a 35.3 percent increase for the top bracket. Another option would be to increase Property Tax by about 3.7 percent, but constitutional hurdles make this an unlikely course of action. The committee also suggested a funding option consisting of broadening the base of the Sales and Use tax to cover items like bottled water and increasing the rate by an estimated whopping 28 percent.
While these broad-based tax increases would impact the entire state population, other proposals specifically target the business community. The state could impose a payroll tax on employers and employees to pay for healthcare; a rate of 14 percent (on each side) would generate the $200 billion in required revenue. The final option offered is the creation of a gross receipts tax, which is a tax on business sales; the rate for such a tax to generate the necessary revenue would be five percent.
The latter two options, a payroll tax and a gross receipts tax, would unquestionably have grave financial implications for the state economy generally and all businesses in California specifically. The good news is the percentages those taxes would require are so large that the odds of either coming to pass are slim to none.
To generate $200 billion annually, the state would almost certainly use multiple revenue streams in an attempt to blunt the economic impact and share the pain. This legislative process is where political influence and lobbying comes into play, as every stakeholder scrambles to push the tax burden onto anyone but themselves. This scenario may not be a bad thing for the business community, which carries considerably more political weight than any other group at the table, but the likelihood of anyone escaping the process without taking a financial hit is slim.
The report of the Assembly Select Committee on Health Care Delivery Systems and Universal Coverage is sure to generate debate, and due to the enormous complexity involved, not likely to lead to any actual policy in the immediate future. But anyone who owns a business in California should stay informed on the issue of healthcare coverage. Not only is it not going away anytime soon, but the implications of universal statewide healthcare will absolutely have a fundamental impact on your business. The best way to for your business to adapt to changes in the law is to have qualified legal counsel to ensure you take all the right steps to protect yourself. Contact NM Law, APC to discuss whether the legal structure of your business is right for you.
The report by the Select Committee can be found at: http://healthcare.assembly.ca.gov/sites/healthcare.assembly.ca.gov/files/FINAL%20LAO.pdf
Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.