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Budget Neutral, Revenue Neutral December 13, 2009

Posted by Ken in Politics, Taxation.
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In the current Health Care Reform debate raging across America, two terms are being used as if they were synonyms – “Budget Neutral” and “Revenue Neutral” – nothing could be further from the truth.

The term “Budget Neutral” describes legislation that includes authorization for any new revenue stream needed to implement the legislation. For example, if the state were to decide to offer every child under 10 years old a free teddy bear, and they also taxed every person over the age of 18 one dollar per year to underwrite the program, this could be accurately described as “Budget Neutral,” since the legislation includes the new tax to pay for the new teddy bear program.

The term “Revenue Neutral” describes legislation that does not increase current revenue streams to fund the proposed legislation, instead it eliminates or reduces other expenditures to provide the necessary funding. An example of this would be if the state government were to shift funds from after-school programs to pay for free lunch programs. The schools would require no new funds to pay for the free lunch program, since the monies would come from an existing revenue source, the current after-school program.

Neither Health Care Reform bill (House or Senate versions) currently under debate are Budget Neutral – they are Revenue Neutral – while they discuss cutting costs, trimming waste, and other cost savings (hallmarks of revenue neutrality), those don’t add up to the total cost of the proposed plans, so the bills also include new taxes on so-called “Cadillac Plans,” high-earners, employers that don’t offer their employees subsidised health care coverage, and penalties and fines for those individuals that choose to avoid buying health care insurance. Those taxes and penalties are new revenue streams, and are the defining elements that make the current legislation Budget Neutral, not the more desired Revenue Neutral.

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