During the presidential campaign, Barack Obama famously and effectively attacked John McCain for threatening to eliminate the tax exclusion for group health insurance. "For the first time in American history, he wants to tax your health benefits," Obama said in a typical flourish. "Apparently, Senator McCain doesn't think it's enough that your health premiums have doubled. He thinks you should have to pay taxes on them too."
But one of the worst kept secrets in Washington these days is that Obama and his advisers are willing to consider the idea of, you guessed it, taxing your health benefits. At least some of the time. For some of the people.
To be clear, such a move would happen in the context of an entirely different health reform proposal than McCain was suggesting. McCain's plan would have undermined employer-sponsored insurance and forced large numbers of people to purchase insurance as individuals through an unregulated market, where it can be incredibly tough to buy decent coverage. Obama's reforms, if executed properly, would make good coverage available to everybody. And they'd still leave in place most employer-sponsored insurance. Changing the tax treatment of health benefits would simply provide a nice way of financing these reforms.
preferred his health care agenda to McCain's, you needn't have second thoughts. You did the right thing.
Still, the notion of altering the tax exclusion even under these conditions is already proving controversial. Sunday's New York Times carries a quote from Alan Reuther, legislative director of the United Auto Workers, saying "These proposals would represent a tax increase on working families. They would undermine good health care coverage." And while the UAW these days should probably be a lot more worried about holding onto jobs than preserving generous health benefits, strategists believe the public isn't too keen on the idea, either--a sentiment, surely, Obama's campaign rhetoric did nothing to change.
And this could be a big problem for reformers. Making insurance available to everybody will likely require at least a trillion dollars in net revenue over ten years--and quite possibly a lot more. Obama's budget proposal puts forward about half that amount--and, in this political environment, there may be only one other place to find the rest of the money. That place is the tax exclusion. Eliminating even a portion of the existing tax break would be enough to make up the difference between what Obama has already proposed to set aside and what's necessary to bring insurance to every American.
Fortunately, fiddling with the tax exclusion in this way turns out to be a good idea on the merits. Not only would it raise the money we need for universal coverage. It would also open the door to making other changes in our health care system--the kind that are necessary if, over the long run, we want to give people better, less costly medical care.
Let's start with the basics of how the tax break works. When your employer pays you wages, the government subjects that money to the income and payroll taxes. But if your employer also gives you health insurance and kicks in some of the premiums, the government doesn't apply taxes to that amount.
The distinction goes back to the 1940s, just after World War II, when government regulators decided linking health insurance to the workplace would help spread insurance coverage to the working population. It turns out they were more or less right. Since a dollar of health insurance became more valuable than a dollar of income, workers pressed for more benefits--and employers happily obliged. Enrollment in employer-sponsored insurance swelled over the next decades, finally peaking in the 1970s. Most economists will tell you that the tax exclusion is a major reason why.
But most economists will tell you something else: The exclusion distorts the market. It tilts the incentives for purchasing insurance; people tend to buy more than they really value, which in turn can foster over-consumption of medical services. And while sometimes this is a good thing--some people underestimate their risk of illness and financial catastrophe--the tax break also skews its benefits in a way that reinforces inequality. As a break on personal income taxes, its value is relatively higher for people in higher tax brackets. Throw in the fact that richer people tend to have more generous benefits anyway, and what you have is a really nice tax break for people who are well-off and have the most generous health benefits--generally speaking, the people who need help from government and society the least.
Most conservatives hear all of this and say, "Well, let's just get rid of the exclusion altogether." That's basically what McCain was proposing during the presidential campaign. Trouble is, without the exclusion, lots of people will stop taking their employer's health coverage and buy individual coverage instead. And since individual policies don't work well for people with pre-existing, chronic medical conditions--the policies aren't as available and, when they are, the benefits tend to be less complete--the people fleeing group policies will primarily be the healthy. The only ones left taking group policies from their employers will be the sick, whose rates will skyrocket--until they can't afford insurance at all (or their employers stop offering it).
Some liberals have taken the conservative insight and gone a few steps further. They've proposed to eliminate the exclusion but to enact a bunch of other reforms, too, so that individuals can get affordable, comprehensive plans on their own. The best example of this right now is probably the bipartisan plan that Senator Ron Wyden has been pushing. Under his plan, everybody would get what is, in effect, a voucher to buy insurance on his or her own; the coverage would have generous benefits and be available to anybody, regardless of medical condition, at the same price. To finance this transformation--that is, to pay for the vouchers--Wyden would (indirectly) get rid of the employer exclusion.
In the aggregate, Wyden's plan would redistribute money, from wealthy to poor and from healthy to sick. It would also re-align some of the poor incentives in the status quo. In these respects, his plan has a lot to recommend it. And it's a point Wyden has tried to press whenever he could. Twice in the last few weeks, Budget Director Peter Orszag--one of the key architects of health care policy in the Obama Administration--has appeared before committees on which Wyden sits. Both times, Wyden asked a leading question about whether tapping the employer exclusion would be a smart way to finance health insurance expansions. Both times, Orszag hinted strongly that the administration thought it might be.
Still, like other Obama officials, Orszag wouldn't endorse the proposition explicitly. Nor will the administration propose such an initiative on its own. Congress will have to take the initiative. And many congressional Democrats have their own reservations, thanks in no small part to organized labor. Unions like the UAW and the Teamsters strongly oppose such a reform because their members bargained for generous health benefits over the years and have held onto them.
Lurking beneath this opposition is a legitimate substantive point. A sudden, total removal of the exclusion would mean a tax increase for at least some lower-income and middle-income individuals with employer-sponsored insurance. You can argue these people would still be better off, since they'd have something they don't have now (guaranteed health insurance). And you can argue that, in a well-functioning economy, they'd eventually get that money back as higher wages. But the short-term effect would still be a tax increase people would feel right away. That makes the proposals tough to sell politically.
* | PAGE
* 1
* 2
* |
NEXT PAGE
But one of the worst kept secrets in Washington these days is that Obama and his advisers are willing to consider the idea of, you guessed it, taxing your health benefits. At least some of the time. For some of the people.
To be clear, such a move would happen in the context of an entirely different health reform proposal than McCain was suggesting. McCain's plan would have undermined employer-sponsored insurance and forced large numbers of people to purchase insurance as individuals through an unregulated market, where it can be incredibly tough to buy decent coverage. Obama's reforms, if executed properly, would make good coverage available to everybody. And they'd still leave in place most employer-sponsored insurance. Changing the tax treatment of health benefits would simply provide a nice way of financing these reforms.
preferred his health care agenda to McCain's, you needn't have second thoughts. You did the right thing.
Still, the notion of altering the tax exclusion even under these conditions is already proving controversial. Sunday's New York Times carries a quote from Alan Reuther, legislative director of the United Auto Workers, saying "These proposals would represent a tax increase on working families. They would undermine good health care coverage." And while the UAW these days should probably be a lot more worried about holding onto jobs than preserving generous health benefits, strategists believe the public isn't too keen on the idea, either--a sentiment, surely, Obama's campaign rhetoric did nothing to change.
And this could be a big problem for reformers. Making insurance available to everybody will likely require at least a trillion dollars in net revenue over ten years--and quite possibly a lot more. Obama's budget proposal puts forward about half that amount--and, in this political environment, there may be only one other place to find the rest of the money. That place is the tax exclusion. Eliminating even a portion of the existing tax break would be enough to make up the difference between what Obama has already proposed to set aside and what's necessary to bring insurance to every American.
Fortunately, fiddling with the tax exclusion in this way turns out to be a good idea on the merits. Not only would it raise the money we need for universal coverage. It would also open the door to making other changes in our health care system--the kind that are necessary if, over the long run, we want to give people better, less costly medical care.
Let's start with the basics of how the tax break works. When your employer pays you wages, the government subjects that money to the income and payroll taxes. But if your employer also gives you health insurance and kicks in some of the premiums, the government doesn't apply taxes to that amount.
The distinction goes back to the 1940s, just after World War II, when government regulators decided linking health insurance to the workplace would help spread insurance coverage to the working population. It turns out they were more or less right. Since a dollar of health insurance became more valuable than a dollar of income, workers pressed for more benefits--and employers happily obliged. Enrollment in employer-sponsored insurance swelled over the next decades, finally peaking in the 1970s. Most economists will tell you that the tax exclusion is a major reason why.
But most economists will tell you something else: The exclusion distorts the market. It tilts the incentives for purchasing insurance; people tend to buy more than they really value, which in turn can foster over-consumption of medical services. And while sometimes this is a good thing--some people underestimate their risk of illness and financial catastrophe--the tax break also skews its benefits in a way that reinforces inequality. As a break on personal income taxes, its value is relatively higher for people in higher tax brackets. Throw in the fact that richer people tend to have more generous benefits anyway, and what you have is a really nice tax break for people who are well-off and have the most generous health benefits--generally speaking, the people who need help from government and society the least.
Most conservatives hear all of this and say, "Well, let's just get rid of the exclusion altogether." That's basically what McCain was proposing during the presidential campaign. Trouble is, without the exclusion, lots of people will stop taking their employer's health coverage and buy individual coverage instead. And since individual policies don't work well for people with pre-existing, chronic medical conditions--the policies aren't as available and, when they are, the benefits tend to be less complete--the people fleeing group policies will primarily be the healthy. The only ones left taking group policies from their employers will be the sick, whose rates will skyrocket--until they can't afford insurance at all (or their employers stop offering it).
Some liberals have taken the conservative insight and gone a few steps further. They've proposed to eliminate the exclusion but to enact a bunch of other reforms, too, so that individuals can get affordable, comprehensive plans on their own. The best example of this right now is probably the bipartisan plan that Senator Ron Wyden has been pushing. Under his plan, everybody would get what is, in effect, a voucher to buy insurance on his or her own; the coverage would have generous benefits and be available to anybody, regardless of medical condition, at the same price. To finance this transformation--that is, to pay for the vouchers--Wyden would (indirectly) get rid of the employer exclusion.
In the aggregate, Wyden's plan would redistribute money, from wealthy to poor and from healthy to sick. It would also re-align some of the poor incentives in the status quo. In these respects, his plan has a lot to recommend it. And it's a point Wyden has tried to press whenever he could. Twice in the last few weeks, Budget Director Peter Orszag--one of the key architects of health care policy in the Obama Administration--has appeared before committees on which Wyden sits. Both times, Wyden asked a leading question about whether tapping the employer exclusion would be a smart way to finance health insurance expansions. Both times, Orszag hinted strongly that the administration thought it might be.
Still, like other Obama officials, Orszag wouldn't endorse the proposition explicitly. Nor will the administration propose such an initiative on its own. Congress will have to take the initiative. And many congressional Democrats have their own reservations, thanks in no small part to organized labor. Unions like the UAW and the Teamsters strongly oppose such a reform because their members bargained for generous health benefits over the years and have held onto them.
Lurking beneath this opposition is a legitimate substantive point. A sudden, total removal of the exclusion would mean a tax increase for at least some lower-income and middle-income individuals with employer-sponsored insurance. You can argue these people would still be better off, since they'd have something they don't have now (guaranteed health insurance). And you can argue that, in a well-functioning economy, they'd eventually get that money back as higher wages. But the short-term effect would still be a tax increase people would feel right away. That makes the proposals tough to sell politically.
* | PAGE
* 1
* 2
* |
NEXT PAGE
