Some Congressional Democrats are talking about taxing health benefits
02 12 08 - 15:42
Democrats may tax health benefits
They discuss exclusion limit for wealthier
By Lisa Wangsness
WASHINGTON - In the last month of the presidential campaign, it was one of Barack Obama and Joe Biden's strongest attack lines: John McCain, they warned, would "tax your healthcare benefits for the first time ever."
But now, some Congressional Democrats in charge of health reform are talking about doing just that.
They would not go as far as McCain, who wanted to end the tax exclusion entirely for employer-sponsored insurance, which excludes money spent by employees and their employers on health benefits from income and payroll taxes.
But some key Democrats are talking about limiting the benefit for workers, so that those with higher incomes or more generous health benefits might pay taxes on some portion of the income they use to pay for their health premiums.
The issue is just one in an unfolding discussion of how to overhaul the nation's healthcare system, a goal Obama has said will be an urgent priority when he takes office Jan. 20. The political climate appears right for dramatic changes that could affect millions of families, and interest groups are moving fast to position themselves.
McCain wanted to get rid of the employer tax exclusion and in its place give people tax credits they could use to buy their own health insurance independent of their employers.
Democrats have a very different approach to health reform, but some of them also want to limit the exclusion - not least because the benefit costs the government more than $300 billion a year in potential tax revenues, so it is one of the few large pools of cash available to help fund a major health reform package at a time when money is scarce.
Senator Max Baucus of Montana, chairman of the Senate Finance Committee, recently issued an 89-page health policy paper that many see as an important Democratic blueprint for health reform. His paper raises the possibility of capping tax breaks for health insurance premiums based on income, value of health benefits, or both.
Baucus said Obama's and Biden's relentless campaign rhetoric against McCain for being willing to "tax insurance" did not mean the benefit was off-limits in the reform process. "We're not going to eliminate the exclusion, but we're certainly going to discuss it," said Baucus. "The campaign is over. Barack Obama is our president; we have a majority in the House and a Democratic majority in the Senate. But the goal is to work together. I think we're going to have to use some of Senator McCain's suggestions in order to get an agreed-upon result."
But Democrats could face serious political challenges if they try to scale back the benefit. Unions that are deeply invested in the employer-based system are wary of any changes since employers provide insurance to the vast majority of their members. Business groups are also extremely cautious. And after Obama and Biden so clearly campaigned against "taxing healthcare," Democrats could leave themselves vulnerable to accusations of hypocrisy.
"Once the issue was delineated in the campaign, it's hard to go back because people will remind you that the standard-bearer of the party took a position on this issue," said Robert Blendon, a professor of health policy and political analysis at the Harvard School of Public Health.
"That's one of the things that has to be taken into consideration," said Senator Kent Conrad, a Democrat from North Dakota and chairman of the Senate Budget Committee.
There are a number of arguments for limiting the exclusion, as Baucus noted in his proposal. Some economists believe it encourages people to use too much healthcare because it lets them buy an unlimited amount of healthcare tax-free.
The exclusion is also regressive because it gives bigger breaks to those in higher tax brackets - which means those who can afford the best healthcare get the largest tax benefit, rather than those who need government's help the most.
A 2004 study found that tax breaks on health benefits averaged $2,780 for families with incomes of $100,000 or more, but $102 for those with $10,000 or less, wrote Jonathan Oberlander, a professor of political science and health policy at the University of North Carolina at Chapel Hill, in a recent article in Health Affairs.
Limiting the amount of healthcare premiums that can be excluded from taxable income to $4,000 for individuals and $11,000 for families would generate $1 trillion over the next decade, Oberlander wrote, citing a 2007 report by the Congressional Budget Office. That's roughly the cost of the health reform plan Obama put out in the campaign, according to a recent assessment by PricewaterhouseCoopers.
But even a cap of that size would mean that many middle-class people would suddenly have to pay taxes on some of the income they now use to pay health premiums - the average cost of employer-based health benefits is about $4,700 for single coverage and nearly $12,700 for family plans.
"The problem is a political one," said Oberlander. "What middle-class Americans think about when they think about health reform is not a proposal to tax their health insurance. It's just a difficult sell."
Helen Darling, president of the National Business Group on Health, a nonprofit that represents the perspective of large employers on healthcare issues, said her members would oppose any dramatic changes in the tax treatment of employer-sponsored insurance.
"If you were starting from scratch 40 years ago, a cap wouldn't have been a bad idea, but we have a system already in place," she said. "A very significant number of people in the country will have their benefits taxed at the very time they can't afford another financial hit."
She also noted that a cap would hit Boston-area residents particularly hard since the cost of healthcare is much higher in Massachusetts than it is in most of the rest of the country.
Yet competing political pressures make the idea difficult to dismiss. There is an unprecedented demand for a major health reform package among business groups, health insurers, unions, and liberal advocacy groups, and Obama has promised to deliver one.
The escalating deficit and the recession will make it hard to afford. And a growing number of moderate Democrats in Congress whose support will be needed to pass a plan will be reluctant to support expensive new benefits without a funding source.