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A Senate proposal would make middle-income taxpayers pay more for healthcare bill

23 06 09 - 13:57



Senate Looks to Trim Tax Break for Personal Medical Costs
By MARTIN VAUGHAN - The Wall Street Journal

WASHINGTON -- A proposal in the Senate to limit tax deductions for medical costs would fall hardest on middle-income taxpayers who are uninsured and who come up against expensive health problems.

Currently, a taxpayer may claim a deduction for medical or dental expenses only to the extent those costs exceed 7.5% of the person's adjusted gross income. Senate negotiators are discussing raising that threshold to 10%, in effect denying deductions for many taxpayers who could claim them today.


"For people who do itemize, this tends to be one of the big deductions. In many cases it propels people into being an itemizer," said David Certner, federal policy director at AARP.

In general, trimming the deduction would have less of an impact on lower income taxpayers since deductions are already worth less to people who pay taxes at lower marginal rates.

And the wealthiest taxpayers are less likely to be eligible, since medical costs are less likely to add up to 7.5% of gross income.

Most likely to be affected by a change to the deduction are households with income between $50,000 and $200,000, according to 2009 estimates from the Tax Policy Center. People in that income group claimed 73.1% of the benefit of all the medical and dental expense deductions, according to the data.

The congressional Joint Committee on Taxation said in 2008 that medical and dental expense deductions are worth about $10 billion a year to Americans.

The proposal being discussed by Senate Finance Committee members including Sens. Max Baucus (D., Mont.) and Charles Grassley (R., Iowa), would be just one part of a broad plan to help pay for a health-care overhaul totaling at least $1 trillion.

Limiting medical expense deductions to those in excess of 10% of gross income, instead of 7.5%, would save about $20 billion over 10 years, according to Senate aides.

There is an argument for tightening the limit, said Henry J. Aaron, a senior fellow at the Brookings Institution. It is that health care costs have risen dramatically since 1986, when the floor was fixed at 7.5%.

"Back in 1986, the share of health care spending as a fraction of income was a little more than half what it is today," said Mr. Aaron. "It was harder back then to spend 7.5% of your income on medical costs."

As medical costs have risen, so has use of the tax deduction, which has also become more valuable to taxpayers. It is used not only by the uninsured and self-insured, but by some with high costs that their insurance plans won't cover.

Opponents of the idea question why a health care reform plan would penalize some of the sickest Americans with moderate incomes. "If you're choosing between taxing high-income people and people who have high medical expenses, I don't know why we would want to pick on the latter group of people," said AARP's Mr. Certner.

Write to Martin Vaughan at martin.vaughan@dowjones.com


 

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