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Health tax
break: Sacrosanct no more
Employer
contributions to pay for health insurance are tax-free
to employees. But they may not stay that way, at least
for some.
By Jeanne Sahadi, CNNMoney.com senior writer
March 19, 2009: 5:38 AM ET
NEW YORK (CNNMoney.com) -- Get
ready. Washington is again debating how to fix the
health care system. And the outcome might affect your
wallet.
The discussions are just beginning
and much remains undecided. But expect at least one
thing: To help pay for changes and reduce overall
costs, lawmakers will consider curbing the tax
benefits that employees enjoy when they get their
health insurance plans through work.
Here's the crux of the issue:
President Obama wants to create a $634 billion fund to
pay for health care reforms. Leading lawmakers appear
willing to go along, but they're not keen on how he
has proposed to pay for a big part of it. Obama wants
to cap how much of a deduction high-income taxpayers
may take. The administration estimates doing so could
raise $318 billion over 10 years.
The Senate's top tax writer, Max
Baucus, D-Mont., who is also leading the push for
health care reform, has asked White House budget chief
Peter Orszag to consider instead changing the tax
break that employees receive when their employers foot
part of the bill for their health insurance.
Right now the portion of premiums
paid by employers is treated as tax-free compensation
to employees. And there is no limit on how much
employers may contribute.
Some lawmakers have proposed
eliminating the exclusion entirely and replacing it
with a tax credit or deduction.
But Baucus isn't in that camp.
"I do not favor eliminating it ... and I don't
think that's where the vast majority of Congress is
either. But I do think it needs to be trimmed,
limited, looked at," he said at a presentation at
the Kaiser Family Foundation earlier this month.
While the president doesn't
support the idea of taxing employees on
employer-provided health benefits -- and in fact,
promised during his campaign that if elected nothing
would change for employees who get their insurance
through their jobs -- administration officials have
indicated in different forums that no idea is off the
table when it comes to health reform.
What a cap may ... or may not ... do
The health care exclusion is the
federal government's single biggest tax expenditure.
In other words, Uncle Sam forgoes more potential tax
revenue from this tax break than any other. The
exclusion was worth $246 billion in potential revenue
in 2007, according to the Joint Committee on Taxation.
That number is expected to increase every year as
health care costs rise.
But imposing a cap isn't likely to
raise anywhere near that kind of money although it may
lower costs in the long run because of that old show
stopper: human behavior.
"The goal of the cap is to
get people to buy less comprehensive plans," said
Paul Fronstin, the director of health research at the
Employee Benefit Research Institute.
Translation: Workers who have to
start paying tax on a portion of their health care
compensation may opt for lower-cost, less
comprehensive plans to escape having to pay any tax.
And that would curb how much revenue the federal
government could raise overall.
"When they get down to the
numbers, it won't raise as much money [as they might
need]," Fronstin said.
Figuring out what's fair
Questions of fairness
will play a role in the debate over whether and
where to cap the exclusion and on whom.
One of the criticisms of the
work-based tax break is that
it disproportionately benefits high-income employees,
because they pay the highest tax rates and the value
of the exclusion is based on an employee's top tax
rate.
One idea under consideration is to
impose a cap that "wouldn't affect the majority
of Americans," a Baucus aide told CNNMoney.com.
The aide didn't specify whether that meant only
high-income taxpayers, only those in the very
highest-priced plans or some other group.
Another criticism is that the
work-based tax break disproportionately benefits those
who buy very expensive and comprehensive plans. The
thinking is that Americans aren't aware of the true
cost of health care plans because they only pay for a
portion of their plans, so they're not likely to be
cost-conscious when it comes to deciding on their
insurance, treatments or drugs.
"The goal of capping the tax
exclusion is to tax Cadillac plans, but it won't just
tax Cadillac plans," Fronstin said.
By that he means Cadillac plans
aren't the only ones that are expensive.
The cost of employer-based
insurance plans is dependent on a number of factors,
including the average age of the participants. So, a
younger worker at a company where the average age is
55 will pay more for the same plan as she would if she
worked at a company with a younger employee base. The
same applies if she lives in the Northeast, where
health insurance is more expensive, or if she works
for a small business.
"Those disparities exist now,
but you're not being taxed on them," Fronstin
said.  |
