When could taxing health care benefits be a good idea? If it would achieve the objective that the tax exemption is not able to achieve – universal coverage..
Admittedly, in my last post I offered a knee jerk reaction to the idea of taxing health care benefits. I distrust the motives of those who single out the income tax exclusion for health care benefits. Yes, it is a big number, but not compared to the alternative of footing the entire health care bill.
Why a tax exclusion for health care benefits?
The objective of any tax relief or penalties is (or should be) to promote a larger social purpose. Providing health care coverage certainly meets that test.
Most of those touting an end to the tax exemption for employer sponsored insurance are more interested in raising revenue at the expense of working people than they are in expanding health insurance coverage.
In weighing the merits of the tax policy, at least two questions need to be addressed:
Is the goal achieved?
Is it cost effective?
Given the 40+ million uninsured in this country, the answer to question one has to be an emphatic “no”.
According to CMS national health expenditure data, employers, including government employers, paid 532.4 billion for health insurance premiums in 2007. If the tax exemption cost the US Treasury $170 billion (OMB) that is better than a 3:1 return. That should be an acceptable answer to the second question.
But as the cost of health insurance spirals out of reach even for employers, it is reasonable to ask whether that tax investment is accurately targeted.
Are there other ways to get there?
That brings me to Senator Ron Weyden’s (D-Oregon) Healthy Americans Act. I am not a big fan of an individual mandate to purchase health care insurance. But his proposal contains some interesting ideas.
His most intriguing idea is to convert what employers now pay for health insurance into wages. More important, I like his rationale – “modernize the employee-employer relationship regarding health insurance”
The major issue discussed by those who study workforce demographics is longevity. Young people are delaying their entry into the workforce. Middle age people are taking breaks from work to return to school to upgrade or learn new skills or simply to pursue a business venture idea. Older people are staying in the workforce longer but not as full time workers. Tying health care benefits to employment is a major impediment to maximizing a 21st century workforce. Does Sen. Weyden get it? I hope so.
Another idea in Weyden’s plan that has some merit is that health insurance plans would have to meet certain standards.
Jonathan Cohn, perhaps my favorite health care journalist, describes variations on “exclusion reform” put forward by Jonathan Gruber, an MIT economist.
He suggests maintaining the exclusion for those below a certain income level and gradually phasing it out over higher income brackets.
A modest proposal
Could we combine these ingredients into a plan that:
- Gives employers the option of converting their current payments for health insurance into payments for a national health plan, with any balance converted to taxable wages.
- Taxes those not currently providing health insurance
- Allows employers and unions to “opt out”, but any benefits provided above what would otherwise be a payment for the national plan would be taxable.
- Any benefits offered as supplements to the national plan would be taxable.
- The cost to individuals not employed would be based on income and would be affordable even to the most indigent.
This last item is the most critical for me. The benefit plan that I administer offers generous provisions that allow employees to continue on the group benefit plan during periods of extended illness. Yet employees’ struggle to make their premium payments – about 10% of the total cost. The threat of eviction is more urgent than the threat of illness or disease.
Any reform proposal needs to guarantee continuity of health care coverage in spite of discontinuity of earnings. Ideally that should be administratively and financially seamless.
If taxing some benefits is part of that proposal, fine.