COST: Changing Tax Treatment of Health Benefits Could Find Bipartisan Common Ground

Economists, analysts and courageous policy makers have argued for years that the income tax exclusion for employer premium payments is both regressive and inefficient relative to other ways to subsidize insurance coverage. Several recent comprehensive health reform proposals, including Senator Max Baucus' "Call to Action" and the Healthy Americans Act (S. 391 and H.R. 1321), suggest changing the treatment of employer-provided health benefits (by varying degrees) to help finance a sustainable system for all. 

The 2008 presidential campaign made most American households familiar with the tax treatment of employer-provided health insurance. Unfortunately, the rhetoric of some campaign ads and bruised feelings over the outcome are now stifling the construction of a robust health reform proposal. Our leaders should not be deterred from changing the tax code wisely as part of comprehensive reform. 

• The current tax treatment of employer-provided coverage disproportionately favors high-income individuals. When a worker gets health insurance through an employer, the value of his or her health benefits is not considered taxable income. Avoiding taxes is worth more in absolute dollars to workers who make more money and have higher marginal tax rates. Further, high-wage workers are more likely than low-wage workers to be eligible for health care (and hence a tax break) through their employer. In short, the current tax exclusion is regressive. It fails to focus the government's resources on the people who most need help affording health insurance. Plus, because the subsidy is open-ended, the government subsidizes the cost of the most outrageously expensive plans even for those who can afford to buy them, regardless of the cost.

• This is not Senator McCain's campaign proposal. Senator McCain's campaign proposal eliminated the tax break without making the changes we need to create an equitable and sustainable health system for all. His proposal permitted the sale of insurance across state lines and hence the de facto deregulation of the individual insurance market. This was the plan's central flaw. Eliminating the employer tax exclusion doubled the whammy by reducing our current subsidy—the regressive tax break—and throwing tens of millions of Americans into an effectively deregulated individual insurance market. Let me be crystal clear. We should not change the tax treatment of employer-provided health benefits unless we are committed to: 1) reforming the health insurance marketplace to ensure coverage is accessible to all, and 2) ensuring that every American can afford quality coverage regardless of whether or not their employer offers insurance. Through market reforms and subsidies we must extend the benefits of large group purchasing to all. Unlike Candidate McCain's proposal, these reforms are central to what Congress and the Obama Administration are talking about.
• Changing the tax treatment of employer-provided health coverage could help build bipartisan consensus. Last year, the Healthy Americans Act built a base of bipartisan support around legislation that used the current employer tax exclusion to mostly finance a progressive system of coverage for all. The CBO scored the proposal as roughly budget neutral in its first full year of implementation. The current policy conversation is not focused on eliminating the whole exclusion. It is looking at the best way to cap or limit the exclusion based on income, benefit level, or both. Democrats and Republicans can find common ground by taking some of the money we waste currently on this regressive tax break and use it to finance health care for all. (We'll soon put up a separate post that shows how a wide variety of thinkers across the political spectrum view the employer tax exclusion.)
• The current economic climate and our long-term budget realities have made paying for comprehensive health reform a prerequisite for action. Over the long-term, we know that we can achieve savings within our health system by delivering far more value for our health care dollars, through quality information and innovative incentives. In the near-term, however, we must establish a credible way to finance coverage expansion and invest in the infrastructure necessary to transform our heatlh care delivery system. The current employer tax exclusion is a poorly targeted subsidy that we should use to make our health system both more efficient and more fair. Pursuing this financing strategy will reduce the short-term savings we must achieve within our health system and allow us to meet our goals without relying on tax increases.

To reform our health system in a fiscally responsible manner we all must share in the responsibility for its financing. The cost of fixing our broken health care system will only worsen over time if we do not act now. As we think about how to finance a system of quality, affordable coverage and care for all Americans, we should remember that some of the resources we have already dedicated could be targeted more efficiently.   

We should continue to debate all possible revenue sources and seek creative, sustainable ways to finance reform. Over the course of the next few weeks, I will continue to consider the tax treatment of employer-provided health care and examine its potential impact on employers, individuals, and society as a whole.