Health Care Will Be Taxed
by Dr. Tony Magana
One of the changes coming to the health insurance system of the United States is likely to be a repeal in the unlimited tax deductibility of employer provided health insurance benefits. Both the Republicans and Democrats are proposing modifications to the status quo that has stood since World War II. How these changes are made will drastically effect what type of health care system evolves.
During the 2008 Presidential campaign, Republican candidate, John McCain put forth changing the classic tax deduction from one that allowed employers to deduct the cost of health care from their taxable earnings. His adduced that this keeps the cost of employer based insurance artificially low and that of individual based insurance artificially high. The goal of the McCain plan was to move away from an employer based system to an individual based system where each family could chose their own plan.
The new architecture under McCain would still deduct a portion of the employer coverage but what have provided tax credit’s to families of $5,000 or to individuals of $2,500. Those with high incomes and whose employers paid more than $15,000 in health costs would pay tax taxes on the benefit while those with lower incomes could receive tax credits which they could cash in to buy private insurance.
During his campaign, Barack Obama, opposed removing the tax deductibility of health care benefits granted by employers. Labor unions whose support helped elect President Obama protested any increased taxation on health care benefits which often are the focus of union negotiations with management. The New York Times reported that a split may be occurring more recently between the older manufacturing based union members who tend to have high benefits and the service workers who often have low benefits. In March the President signaled a reversal in his views even though he had ridiculed John McCain for the same thing during the campaign.
Curiously some in business have adopted a similar attitude to organized labor noting that health care benefits are an important means of recruiting and retaining high quality workers and management. The national Chamber of Commerce is officially against removing health cost deductibility.
The Democratic stratagem of creating a public program to compete with the private health insurance system and the Republican blueprint to expand private coverage by subsidizing low income families will both require billions of dollars to fund initially. Without massive increases in primary tax rates or deduction changes there is no way to adequately fund either proposal. The Congressional Budget Office has said the making health benefits fully taxable could raise $246 billion in revenue.
The apparently most influential Democrat in Congress on health care, Senate Finance Chairman Max Baucus (D–MT) says he wants to keep an employer based system with some deductions but will accept limits on deductions rather than the current unlimited status.
Conservative proponents of change like Greg D’Angelo and Robert Moffit, Ph.D., of the Heritage Foundation say that the current system creates a sizable tax penalty for families or individuals who try to buy insurance that is not employer based. The tax deduction as it currently stands is regressive because no help is extended to lower income tax payers and conversely, may drive up the costs of health care benefits as a disincentive to cost controls.
Getting away from employer based plans and allowing families to choose which specific health plan they want instead of their employer would empower Americans with choice. Changing the tax deductibility will allow this be “leveling the playing field” between employer based and non-employer based plans.
This week the Wall Street Journal reported the Republican alternative called the Patients’ Choice Act would eliminate the tax break for employer based health benefits and replace it with a tax credit of $5,700 per family or $2,300 per individual. Lower income families could receive subsidies to help them buy private insurance.
The Democrats are still leaning to keeping some tax deductions at hand to keep employer based health care in place but will tax the benefit for high income earners or if the benefit is considered “particularly generous”.
At this point there is a high certainty that if any health care reform passes in Congress there will be at least some limits on the deductibility of health care benefits provided by employers. This change is compelling since no other source of available funding can be found to help supply coverage for Americans currently without insurance. William G. Gale, Vice President and Director, Economic Studies for the Brookings Institute has said that this adjustment will help cause the non-employer group insurance markets to function. He also notes that that having consumers being more involved in paying the costs of care will help control costs and lead to more “productive expenditures”.
Americans can only benefit if they are given a real choice in deciding which health insurance program in which to participate instead of being limited to a single employer based program or government run single payer system. There are legitimate concerns that if a coexistent public system like an expanded Medicare is set up to compete with the private system while at the same time penalizing the private system with a significant tax penalty this will ultimately exclusively allow the public system to survive.
There is an important distinction between the market-based proposals of conservatives who propose taxing employer based health benefits but make a tax deduction available to workers to purchase insurance either through their employment or separately and the that of the liberal Democrats in Congress says Michael Tanner of the CATO Institute. Under the conservative plan most workers would receive a net tax cut while under the Democratic plan what will result is a $1 trillion dollar tax increase on the middle class.
The old tax deductibility of employer based health care benefits should be changed but how it is changed may make the difference in whether America has a consumer driven program of choice or a government run public system.
Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Review. Follow him on twitter http://twitter.com/contempomagazin
