PolitiFact's Tax Test: Fair or Unfair?

The late New York Senator Daniel Patrick Moynihan was fond of saying, everyone’s entitled to his own opinions, but not his own facts. So it's regrettable that the San Antonio Express-News’ “PolitiFact” branch would acknowledge some facts, leave out others, and then reach an unfair opinion on an NTU-sponsored ad  warning of a new Medicare Part D “rebate” scheme that was little more than a tax in disguise.

Several months before the ad ran, NTU cautioned that a Part D “rebate” plan was among several “disastrous debt ideas” bouncing around the Supercommittee (http://www.ntu.org/news-and-issues/budget-spending/avoid-these-disastrous-debt.html).  Members of Congress had advocated this debacle before, and President Obama included a version of it in his own Supercommittee recommendations. So we felt compelled to sound the alarm in a Dallas Morning News ad and make certain citizens kept up pressure on lawmakers who might be opposed to the plan.

But even though PolitiFact gave some space to NTU's case for calling this proposal a tax, and seemed to concede some of the other points we made,  the staff nonetheless branded our ad “false,” claiming “Obama's urged rebate remains that--money paid in return for a purchase or action/opportunity. One would have to connect more dots to make it a tax.” Well, here are some of the many dots NTU connected that deserved more mention in the piece.

PolitiFact’s central claim: “Outside experts said they’d never heard the Medicaid rebates -- or proposed Medicare rebates -- referred to as taxes.”

Hmmm. Here is Joseph Antos of American Enterprise Institute, who served on the Maryland Health Services Cost Review Commission and advised the Congressional Budget Office, and writes:

"The so-called rebate isn’t a rebate at all. For a large number of Part D patients, it’s going to function as a tax. Forcing lower drug prices for a few will dramatically inflate health care costs for the rest."

Here is Antos with Guy King in a cite on the “tax" question PolitiFact did use, but the quote bears printing here. King is the former Chief Actuary for Medicare and Medicaid, writing, along with his colleague:

"One of Washington's great political canards is that a tax on business really does not affect anyone other than the companies on which the tax is levied. Usually such a foolish statement is left implicit, but unfortunately that seems to work for most people. The public often seems to have the visceral belief that the initial incidence of a tax is also its final incidence.

Like a tax, the requirement that pharmaceutical manufacturers pay a minimum rebate has its initial impact on the manufacturers but the final incidence would be borne primarily by patients, who are the end-users of the prescription drugs."

Here is Douglas Holtz-Eakin, former CBO Director, who along with Michael Ramlet writes:

"While it is easy to understand the political appeal of the rebate proposal and claims of “windfall” based on a fragmentary view of how Part D works, the policy foundations deserve closer scrutiny. In the end, not only will the cost of a new government rebate, like any tax, be borne somewhere else in the economy, but this analysis shows that seniors will also be forced to pay much higher premiums for their prescription drug plans."

Here is Grace-Marie Turner of Galen Institute, who writes:

"Leading congressional Democrats appear ready to impose a new tax on prescription drugs for seniors -- a tax that would increase Medicare drug plan premiums for some seniors by as much as 40 percent. Those lawmakers wouldn't describe their plan that way, of course, but that would be the effect of their proposal to require drug companies to pay Medicaid-style rebates to Medicare."

PolitiFact duly reported our contention that the "rebate" is based on a percentage of price per unit, a lot like the way some excise taxes on products such as certain tobacco items work. But here's the rest of the story. Calling the proposal "money in return for a purchase or action/opportunity," as PolitiFact does, is an inadequate explanation. That's because the rebate is levied on an ad valorem basis, not in exchange for a service. This is an important consideration: the "rebate" is on the sale of a specific product, using a specified value of the product. That is the most fundamental definition of an excise tax. In fact the Joint Committee on Taxation describes an excise as such: "taxes imposed on a per unit or ad valorem (i.e., percentage of price) basis on the production, importation, or sale of a specific good or service.”

But aren’t taxes mandatory when this rebate isn’t? Not when Washington rigs the rules. As we told PolitiFact, federal and state government programs are capturing an increasingly dominant share of the prescription drug market (about 30 percent for Medicare and Medicaid, more when VA and government employee programs are added in). This has been especially true since the creation of the Medicare Part D benefit. It's one reason why we opposed the Part D program in the first place. For Congress and the White House to legislate more influence over drug-purchasing in the United States, and then say, "well, if you won't pay our latest kickback demands you can't sell in the empire we've created" is coercive.

Throughout NTU's 40-plus year existence, one central part of our mission has been calling politicians to account when they create a plan that looks, acts, and hurts like a tax but refuse to call it a tax. This "rebate" is a clear case of why Moynihan's warning is so relevant today.