Health insurance ‘haves’ to pay for ‘have-nots’?

Tom Curry National affairs writer • Profile • E-mail

As part of a health insurance reform package now before Congress, some of the 164 million Americans who are covered by employer-provided health plans could be asked to give up at least part of the longstanding tax exemption granted to such compensation.

It’s an idea likely to be met with howls of opposition if it makes it into the final version of health insurance legislation that President Barack Obama is pushing.

The idea of limiting the tax break for employer-provided insurance gained momentum last week, when Obama told senators that he’d consider it as one ingredient of the  health insurance reform bill he wants Congress to pass by early August, when the Senate starts a one-month recess.

Senate Finance Committee Chairman Sen. Max Baucus, D-Mont., who conveyed Obama’s willingness to consider the idea after a White House meeting Tuesday, has said the tax treatment of employer-provided health insurance ought to be made “fairer and more equitable for everyone.”

Will you end up with more taxable income?
While details of such an approach are still sketchy, it would likely involve employees paying tax on a percentage of their employer-provided health benefits. So if Congress decided that all such premiums in excess of $11,000 for family plans would be taxable income, and your company paid premiums worth $16,000 for your coverage, you’d have to pay taxes on $5,000. 

Obama’s new openness to the idea stands in contrast to what he said six months ago as a presidential candidate, when he harshly criticized his Republican rival, Sen. John McCain, for proposing that employer-provided benefits should be taxed.

Scolding McCain in their debate on Oct. 15, Obama said, “This is your plan, John. For the first time in history, you will be taxing people's health-care benefits.”

(Watch the video below to see Obama criticizing McCain for proposing a tax on health insurance benefits.)

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Obama also pledged last year not to raise taxes for families making less than $250,000, and a health benefits tax, depending on how it was structured, could run afoul of that promise.

The tax exemption on employer-provided health insurance, which dates to 1943, has already survived one attempt to limit it.

An echo of Ronald Reagan
In 1984, President Ronald Reagan floated the idea of requiring workers to pay taxes on employer contributions to their health insurance exceeding $2,100 a year. A Washington Post editorial the following year called the proposal “surprisingly lucrative yet eminently fair,” and speculated that “(it) might have helped hold down health care costs in the bargain.” But opposition, especially from labor unions, scuttled the proposal.

Obama’s new receptivity to the tax springs from the massive sums of money needed to pay for expanding health coverage to the uninsured.

Obama’s Council of Economic Advisors last week cited a figure of about $125 billion a year to insure the uninsured. But the president aims to do more than that. He also wants to subsidize the cost of coverage for lower-income people, subsidize COBRA coverage for those who lost their jobs and make other changes.

MIT economist Jonathan Gruber told the Finance Committee last month that curbing the health insurance tax break was “both the most natural source of financing for health care reform” and “one of the few that is clearly large enough to finance the subsidies needed for reform.”

According to the congressional Joint Committee on Taxation, the Treasury misses out on $226 billion a year because employer spending on health insurance isn’t counted as taxable income.

That figure dwarfs any other potential health-related revenue sources that have been identified as possibilities to help fund the health care expansion. Among them are a 3-cent-per-can tax on sugar-sweetened beverages, which the Congressional Budget Office estimates would raise about $50 billion over 10 years, or increasing taxes on beer, wine and distilled liquor which, under one CBO scenario, would raise $60 billion over 10 years.

A boon for upper-income people
According to an analysis by the Joint Committee on Taxation, curbing the tax break for employer-provided health insurance would primarily affect the wealthy, who “receive the greatest tax benefit from the exclusion from income.” According to Gruber, “about three-quarters of these dollars go to the top half of the income distribution.”

But opposition to the proposal may be as big a problem for Obama as it was for Reagan.

A Kaiser Family Foundation survey in April that asked whether workers “with the most generous health care benefits” should be required to pay taxes on their coverage found 52 percent of respondents opposed to the idea. Of those who currently have employer-sponsored health insurance, 62 percent opposed it. (The poll of 1,203 adults had a margin of error of plus or minus 3 percentage points.)

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