Committee for a Responsible Federal Budget
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Analyzing Clinton's Health and Education Expansions

Jul 27, 2016 | Health Care

Democratic presidential nominee and former Secretary of State Hillary Clinton recently unveiled expansions of her proposals for higher education and health care. Specifically, Clinton updated her college affordability proposal to offer free rather than reduced tuition to students from families making less than $125,000 who attend in-state public colleges and universities, and she expanded her health care proposal with additional funding for Federally Qualified Health Centers as well as a new option for those age 55 to 64 to buy into Medicare.

Clinton proposes to offset these expansions by applying the current 3.8 percent investment surtax on income above $200,000 ($250,000 for couples) to pass-through entities and enacting related reforms. Because these changes roughly offset each other, we expect little overall change to the findings of our comprehensive analysis Promises and Price Tags: A Fiscal Guide to the 2016 Election, which estimated Clinton would add about $250 billion to current law debt levels by 2026. However, both spending and revenue would be higher than in our prior estimate.

Clinton's Expanded College Plan

Last August, Clinton announced her "New College Compact" to address the cost of higher education. Working with states and colleges to offer free community college, "debt-free" (i.e. low cost) attendance at public universities for low- and middle-earning families, and cheaper loans, the campaign estimated that plan would cost about $350 billion over a decade. By contrast, Senator Bernie Sanders's (I-VT) college plan – which would work with states to offer free public college to all Americans – would cost about $800 billion over a decade.

Clinton's new expansion would move her plan somewhat in the direction of the Sanders plan. Specifically, instead of "debt-free" tuition, Clinton's new plan would work with states and colleges to provide completely free tuition for students from families making less than $125,000 (phased in starting at $85,000 over 4 years) who attend public universities in their home state. The proposal would work by offering grants to states to eliminate tuition, with the size of the grant a state receives based on the net cost students would have otherwise paid for tuition inclusive of the financial aid the institution would offer. Unlike the Sanders plan, these grants would not be available to subsidize tuition for higher earners and would not apply to students attending public colleges and universities outside of their state.

Clinton's expanded college plan would also restore year-round Pell Grant funding to allow students to use the grants toward summer classes and pay for expenses outside of tuition, a proposal from President Obama's budget. Additionally, the expansion includes a three-month moratorium on student loan repayment for all borrowers to allow time for refinancing, a freeze of up to three years on payments for young entrepreneurs, and up to $17,500 in debt relief for social entrepreneurs and those starting businesses in distressed communities. As with Clinton's original plan, it would also continue to provide additional funds to historically black colleges and universities and other minority-serving institutions and expand AmeriCorps's enrollment and financial incentives.

Though no independent estimate of this new plan current exists, it would most likely cost somewhere between the original cost of $350 billion and the $800 billion cost of Sanders's plan. The Clinton campaign estimates a total cost of about $500 billion over a decade – $150 billion above their old plan – though the actual cost would be higher were it not for the four year phase-in.

Clinton's Expanded Health Plan

Clinton's previously-released health care proposals would build upon the Affordable Care Act ("Obamacare") by increasing the insurance subsidies, fixing the so-called "family glitch," encouraging more states to expand Medicaid, promoting enrollment in health exchanges and Medicaid, and repealing the 40 percent excise tax on high-cost employer-sponsored health insurance (the Cadillac tax). We estimated these policies would cost about $400 billion, $250 billion of which would be offset by policies to reduce prescription drug costs (including repealing advertising deductibility), reform Medicare payment models, and encourage states to adopt a "public option" for health care exchanges.

Clinton's new proposals would build on her previous plan by increasing funding for Federally Qualified Health Centers – local community health centers that offer primary care to those with limited access to health care – by about $40 billion. In addition, it would allow adults over the age of 55 to buy into Medicare, give the Secretary of Health and Human Services the ability to block large health insurance premium increases, and triple funding for the National Health Service Corps.

Assuming the Medicare buy-in requires those who buy in to pay the full cost of Medicare – as Clinton has supported in the past – the net fiscal impact of this proposal would likely be small and depend mostly on various interactions (which themselves would depend to a great degree on various design choices).

If this assumption holds, the net cost of Clinton's additional health policies would likely be about $50 billion over ten years on top of the $400 billion gross cost (and $150 billion net cost) we previously estimated.

The Offset: Expanding the 3.8 Percent Investment Surtax

In total, the health and education expansions proposed by the Clinton campaign would likely cost at least $200 billion and possibly more. Though not discussed on their website, the Clinton campaign has said it would offset these new costs primarily by changing the current 3.8 percent investment surtax that applies to income above $200,000 for individuals and $250,000 for couples.

Currently, this 3.8 percent surtax applies to investment income – including capital gains, dividends, and interest. Similarly, wages above $200,000 ($250,000 for couples) face a Medicare payroll tax of 3.8 percent – including the 2.9 percent base tax and a 0.9 percent additional tax. As a result, both earned income and investment income above $200,000/$250,000 faces a 3.8 percent tax; however, certain pass-through business income does not face this tax. Clinton would adopt a proposal from President Obama's Fiscal Year (FY) 2017 budget to apply this 3.8 percent tax to income earned by owners of S-corporations, limited partners, and members of limited liability corporations (LLCs).

In addition, the Clinton campaign would adopt changes to prevent small business owners from declaring certain wage income as business income in order to avoid paying payroll taxes on it. Specifically, Clinton would adopt President Obama's proposal that would apply payroll taxes to income earned by owners of "professional service businesses" who materially contribute to their respective businesses. Examples of these kinds of small businesses include law firms, consulting firms, and accountants.

According to the Joint Committee on Taxation, these provisions together would raise roughly $235 billion in revenue over the next decade, including nearly $200 billion of income and Medicare payroll tax revenue and nearly $40 billion of payroll tax revenue for the Social Security trust funds. The non-Social Security portion of this revenue would be sufficient to pay for the campaign's new health and education proposals based on their own cost estimates.

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Because Clinton's proposals are roughly offset, they are unlikely to significantly impact the bottom line of our analysis Promises and Price Tags, which estimated her plans would add about $250 billion to the debt over a decade. However, both spending and revenue will likely be higher than our previous estimates; instead of increasing spending by $1.45 trillion and revenue by $1.2 trillion over a decade, an updated estimate would likely find a spending increase of $1.6 to $1.7 trillion and revenue increase of $1.4 to $1.5 trillion.

In the coming weeks and months, we will fully update our Promises and Price Tags report to incorporate these and other additions, modifications, and clarifications to the proposals of Hillary Clinton and Donald Trump. In advance of our next update, we hope both candidates put forward meaningful deficit reduction plans to begin putting the debt on a sustainable downward path relative to the economy.

This policy explainer is a part of our Fiscal FactCheck series on the 2016 presidential election. Read more policy explainers and factchecks: