Taxing Health Care – Tiresome but Persistent

June 6, 2009

The old saw, “The devil is in the details” does not seem to apply in the discussion on taxing health care benefits.  While there appears to be a certain momentum behind this idea, the details of the consequences (other than raising revenue) are barely discussed.

mad_hatterJonathan Cohn, a writer I generally admire, gives high praise to a new report by the Center for Budget Priorities, arguing that this report should prompt people like me to rethink our opposition to the idea.

So perhaps their latest message will get through to liberals and liberally inclined interest groups that oppose tinkering with the tax exclusion for health benefits. The title of their new report says it all: “Limiting the Tax Exclusion for Employer-Sponsored Insurance Can Help Pay for Health Reform: Universal Coverage May Be Out of Reach Otherwise.”

I recently detailed  the devils that I was concerned about.  The CBP attempts to address some of them.  So let’s take a closer look at their arguments, using the reports own headings.

The Exclusion is the nation’s costliest tax subsidy.

Duh?  Health care is one of the fastest growing expense items in the federal budget.  It is also one of the fastest growing cost items for private business.  Which costs less, the loss of tax revenue or paying the full freight for the health care now provided by the private sector?

Am I missing something?  A tax subsidy is how the federal government provides incentives to the private sector to do what it doesn’t want to do itself.  The real issue is this.  Does the private sector do a good job of providing health care to the public?  If yes, continue the subsidy.  If no discontinue the subsidy and let the government take over that responsibility.  But don’t take away the tax subsidy and expect the private sector to continue their responsibility for providing health care.  That’s a bit like getting off the toilet, and then, well you get my drift.

The exclusion is poorly targeted. It increases health care spending

Yes, it is poorly targeted.  Go back to item one.

The point that it increases health care spending is an argument that appeals to some.  But to support it you would have to show that the rich with health insurance use more health care than the poor with health insurance.  And also show that somehow that difference is explained mostly by the preferential tax treatment.  I don’t see that argued at all; let alone successfully.

Exclusion Can Be Reformed Without Eroding Employer-Sponsored Insurance

Very doubtful.  But this is a topic all by itself.  But what about eroding the income of middle class tax payers?   Where is that discussion? After all, where is this pot of money coming from?

Our experience and the experience of others with the taxation of domestic partner health benefits tells us that taxing the benefits of just one person, not the family, of a middle class ($30k – $50k) wage earner reduces take home pay by $30 to $50 dollars per week.  Let me repeat that.  Taxing health care benefits of middle class tax payers will reduce take home pay by at least $30 to $50 PER WEEK.

Some writers dismiss this argument without even describing it.  Just an off hand comment that “labor hates it.”  It seems no one else is sticking up for the middle class on this point.

Structuring a limit on tax exclusion

This section goes part way to addressing some of the arguments I raised in my previous post.  But the CPB arguments step through the looking glass, as do their arguments about eroding employer sponsored insurance, with this statement:

If properly designed, a limit on the tax exclusion could be administered equitably and without large compliance burdens for employers or workers.

Perhaps I have just a bit too much experience with the phrase “without large compliance burdens.”  Or maybe I just feel that our health care system spends far too much on administrative expenses.  We should find ways to spend less, not dismissing ever mounting marginal increases in administrative “compliance burdens” that have absolutely nothing to do with the delivery of health care.

Charley James of the LA Progressive offers the best response.

The Kennedy plan is relatively simple; the emerging Baucus plan sounds as if it is being written by Jackie Mason.

First, you take health plans that are tax free now and you make some of them taxable, but not all of it, and not for everybody. But who? We don’t know who! Then, a new tax deduction puts money in the pocket of the people who we don’t know who they are so they can take it out again and buy what they had for free in the first place. Next, the money the states use to pay for medical care for people who don’t have health insurance could be used to pay for people who don’t have health insurance which means they can’t get good health care. But we don’t know who they are, either. Well, maybe we know, but we’re not sure, so we won’t say. Then, three million people who don’t have any health insurance will have money from the tax deduction they didn’t want, to buy health insurance on their own if they have enough income to take advantage of a $15,000 deduction and can actually can buy a policy that provides coverage. There might be six people in America who can do this. So we’re taking money from here, and moving it over there, and then back to here, which where it was in the first place and now let’s have some tuna because I’m exhausted.

Taxing health care benefits is a bad solution on top of a bad idea – employer sponsored health care.  Give the money currently spent on health care by employers to the employees, then tax it.  Then let the governement provide health care.