This week Peter R. Orszag, director of the Whitehouse Office of Budget and Management (OMB) has been making statements on healthcare reform and opening up the possibility of taxing healthcare benefits to pay for the reforms… a notion promoted by Senator McCain on the presidential campaign trail and now Senator Max Baucus, Chairman of the Senate Finance Committee.
In fact, at a recent Congressional hearing, Orszag told Senator Ron Wyden (D-OR)– whose health care legislation would make benefits taxable—that taxing healthcare benefits “most firmly should remain on the table.”
Additionally, CNN’s John King this past weekend got Orszag to offer similar responses. Specifically, the OMB Director noted that while taxing health care benefits “was not in the president’s campaign plan or budget,” the Administration is going to let members of Congress “who are proposing to tax health benefits” play it out. Treasury Secretary Timothy F. Geithner has also echoed the idea of taxing health benefits as an option. Of course, he would have to be reminded to pay those taxes first before the rest of America would.
The Wall Street Journal also reports that Orszag is hinting at leaving the option on the table. According to other sources, both Orszag and Jason Furman, the deputy director of the White House National Economic Council, favor taxing some employer-provided health benefits and using the revenue savings for other health-related incentives.
Ironically, although President Obama during the presidential campaign opposed John McCain’s plan to tax health benefits provided by employers, he is “signaling that he might not fight Congress if it passes a plan to do that, according to the New York Times. Moreover, during the campaign President Obama declared that taxing health care benefits would serve as “the largest middle-class tax increase in history.”
Accordingly, politicians in favor of taxing health care benefits, like Senator McCain (R-AZ), call tax-free benefits “gold-plated policies that result in inefficient and costly demands for health care and pressure on employers to hold down workers’ pay as insurance expenses rise.” In addition they assert that tax-free benefits “discriminate against those — many of whom are low-income workers — who do not have employer-provided coverage.”
But the latest figures for 2007 show that 70 percent of the 253 million people with health insurance received at least some of their coverage through employers, and employment-based insurance covers three-fifths of the population under 65.
In fact, most Americans with insurance get it from their employers, and taxing workers for the benefit is opposed by union leaders and some businesses. So what exactly is the former Presidential Candidate referring to? Unemployed, part-time workers, illegal immigrants, or that wonderful group of 18-35 year-olds who think they are invincible?
On the other side of the battlefield, Senator Baucus, whose committee has jurisdiction over tax policy and health programs, is mounting opposition to the President, along with his counterpart in the House, Representative Charles B. Rangel (D-NY), who is chairman of the Ways and Means Committee. Both of these powerful legislators disagree with President Obama about limiting the income tax deductions that the most affluent taxpayers claim.
Specifically, the Finance Chairman notes that Mr. Obama’s proposed limit on deductions would only raise an estimated $318 billion over 10 years, which is a fraction of the revenues that could be raised from taxing employer-provided health benefits. Yet how does the President plan to limit deductions, while also preserving employer-provided coverage, which he has advocated for?
President Obama also included in his budget tax provisions that promote wellness and healthy lifestyle choices, something that employer’s have already implemented (e.g. losing weight, exercise, quitting smoking).
In response, the Senator from Montana noted the Congressional Budget Office, which says that including health benefits in taxable income could mean $246 billion in additional revenue for a single year, and that stopping short of full taxation, would mean less new revenue. As a result, Mr. Baucus, in his widely cite ‘White Paper’ also addressed taxing benefits above some value, taxing only wealthy employees or both.
But Baucus is forgetting an important factor: If the government (HHS and Congress) could control spending, waste, and abuse on current programs like Medicare and Medicaid, there wouldn’t be a need in the first place to be raising all of this additional revenue. And, even if additional revenue was needed (for HIT or EHRs) it would certainly not need to come from tax-payers pockets that already pay high premiums and out-of-pocket expenses.
Consequently, many Democrats, especially House liberals, are opposed. Specifically, Representatives like Pete Stark (D-CA), chairman of the Ways and Means Subcommittee on Health, believe that Congress must “maintain as much as they can of the employer payments.”
Furthermore, according to Frank B. McArdle, a health policy expert at Hewitt Associates, a benefits consulting firm, “If President Obama agrees to cut back the tax break for employee health benefits, he will risk repeating one of Mr. Clinton’s errors by disrupting health insurance for people who have it and like it.”
Additionally, considerations from big businesses regard nontaxable employment benefits as a tool for recruiting and retaining workers. For example, the United States Chamber of Commerce opposes eliminating the exclusion on health benefits, according to James P. Gelfand, senior manager of health policy.
At the same time, Alan V. Reuther, legislative director of the United Automobile Workers, said: “These proposals would represent a tax increase on working families. They would undermine good health care coverage.”
As a small business owner, I can personally attest to the hardship that this would cause our employees. With health insurance premiums running from $400 for a single person to $1,500 for a family this would be a huge tax increase for many people who need the cash the most.
Baucus & Grassley Finance Proposals
In addition to the recent comments from executive branch officials, Senators Grassley (R-IA) and Baucus released a rough outline and plan Financing Comprehensive Health Care Reform: Proposed Health System Savings and Revenue Options.
The document includes policies for discussion before the Finance Committee marks up legislation in June.
Three areas of potential funding sources explored in the financing options are:
- Savings achieved from within the health care system from reductions in current levels of spending;
- Reevaluating current health tax subsidies; and
- Changing non‐health tax provisions
Senators Baucus and Grassley will hold a meeting of Finance Committee members to "walk through" the financing policy options on Wednesday, May 20, 2009. Here are a brief summary of the policies:
- Exclusion for Employer‐Provided Health Insurance: These options include capping the exclusion based on the value of health insurance policy or the income level of the employee eligible for the exclusion. A third option would be to cap the exclusion based on both the value of the health insurance policy and income level. Another option would be to convert the employer‐provided health insurance exclusion to an individual tax deduction or credit. The options also consider whether to grandfather in existing plans so that benefits provided under existing collective bargaining agreements are not limited. (as stated previously this would be a hardship for employees with health plans with tax increases ranging from $100/month to $600/month).
- Modify Health Savings Accounts (HSAs): The policy options explore three ways to modify HSAs. The first option would restrict HSA contributions to the lesser of the individual’s deductible or the statutory limit. The second option would increase the penalty for withdrawing from an HSA for non‐medical expenses from 10 percent to 20 percent. The third option would require certification from the employer or from an independent third party that HSA withdrawals were made for medical expenses. (HSA’s have been very successful for those who have figured out how they work, now that you have worked out the details, they are going to get a whole lot more expensive)
- Modify or Eliminate Flexible Spending Accounts (FSAs): The policy options explore limiting the amount that can be contributed to an FSA or eliminating FSAs altogether. (FSA’s are not open to small business owners but our employees enjoy the benefit, as it helps them pay co-pays, medication and dental bills using pre-tax dollars)
- Standardize the Definition of Qualified Medical Expenses: The policy option would apply a standard definition of qualified medical expenses across the board.
- Modify the Itemized Deduction for Medical Expenses: The policy options examine elimination the itemized deduction for medical expenses or raising the seven and a half percent floor for claiming deductions. ( If you are spending over 7 ½ percent of your income on healthcare bills, then you need this deduction.)
- Modify the Special Deduction for Non‐Profit Blues: The policy options look to either reduce the special tax deduction from 25 to 10 percent or eliminate the deduction and unearned premium exclusion altogether. (Those Blue Cross Plans need to cost more, just ask the senate)
- Modify the FICA Tax Exemption for Students: The IRS issued regulations to narrow the definition of school for purpose of the exemption and better describe student employment. The policy option would formally adopt the IRS regulation into law. (Those radical medical students should love this one. I remain hopeful that American Medical Student Association comes out in-force in favor of this recommendation)
– Medicare Payroll Tax for State and Local Government Employees: The policy option would extend Medicare payroll tax to all State and local government employees. (I guess there is no one safe from the tax increases we will see in order to pay for healthcare reform)
- Modify the Rules Pertaining to Nonprofit Hospitals – Under the policy options, non‐profit hospitals would be required to maintain a minimal level of charitable activity, limit charges to uninsured, indigent patients, and limit aggressive collection actions. Hospitals that do not meet those requirements would be subject to an excise tax. (Great, now there will be a threshold that you have to loose money to remain an non-profit hospital)
- Increase Taxes on Alcoholic Beverages: The policies present the option of standardizing the tax on alcohol and increase the excise tax to $16 per proof gallon. (Bring this one up at the local pub, see how long you will last)
- Impose an Excise Tax on Sugar‐Sweetened Beverages: The policy options would expand on what some states have already done by imposing a federal tax on beverages sweetened with sugar, high fructose corn syrup, or other similar sweeteners. The tax would not apply to artificially sweetened beverages. (Coke and Pepsi will love this one)
Since this reform will inevitably affect all Americans, and because the people most affected by this policy are the people who are also the most likely to have trouble affording health care, the Senate needs to find funding from somewhere else.
Until Congress can figure out how to keep money in American’s pockets for prescriptions, co-pays, and premiums, they cannot expect to tax people for care they can’t already afford.
Senate Finance Committee: Financing Comprehensive Healthcare Reform
Please send your comments in:
Public comments should be directed to Health_Reform@financedem.senate.gov. The deadline for public comments on the financing policy options is May 26, 2009.