Workers' Health Benefits Eyed for Taxation

Sen. Max Baucus advocates taxing health benefits.
Sen. Max Baucus advocates taxing health benefits. (Jay Mallin - Bloomberg News)
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By Lori Montgomery
Washington Post Staff Writer
Thursday, March 12, 2009

With President Obama's plan to tax the rich to pay for health care facing deep skepticism on Capitol Hill, key lawmakers are pressing a different way to raise money: taxing the health benefits workers receive from their employers.

Since companies began offering group health insurance on a large scale during World War II, the value of that benefit has never been counted as income, reducing workers' taxable earnings by an average of $9,000 a year for family coverage.

In recent weeks, however, Sen. Max Baucus (D-Mont.), chairman of the tax-writing Finance Committee, has repeatedly advocated changing tax laws to include employer benefits, arguing that it makes sense to fund the health-care changes by sucking cash out of the existing system. Meanwhile, 13 other senators -- from both sides of the aisle -- have signed on to a plan for universal coverage that includes a tax on employer-provided benefits.

"I think it's extremely important from a credibility standpoint to show the American people that you're making savings in the enormous sums now being spent on health care before you go out and ask them for billions of dollars more," said Sen. Ron Wyden (D-Ore.), one of the sponsors of that proposal. "And I don't think I'm the only senator who feels that way."

So far, administration officials have been careful not to endorse the idea, which Obama blasted as a major tax increase last year after Sen. John McCain (R-Ariz.) made it the centerpiece of his presidential campaign's health plan. But the president hasn't slammed the door on it, either.

This week, White House budget director Peter Orszag said taxing employer benefits was among several ideas that "most firmly should remain on the table." White House economic adviser Jason Furman called for an end to the so-called "employer exclusion" before he joined the administration. Meanwhile, some congressional Democrats say the White House has signaled that Obama would accept a tax on employer benefits as long as he didn't have to propose it himself.

"Everybody's got to share together in the solution. And this might be one component to sharing," Baucus said in an interview. But "it's early," he said. All the tax proposals will be analyzed before his committee tackles the funding question in May.

The debate on how to pay for Obama's plan to expand coverage to some of the 46 million Americans who lack health insurance is nearly as hot as the debate on the details of remaking the health system itself. By raising taxes and cutting spending on federal health programs, Obama has proposed creating a $634 billion reserve fund that would serve as a "down payment" on changes expected to cost well over $1 trillion over the next decade.

Some of Obama's ideas to generate that revenue have been well received, but others have run into serious opposition. For example, Obama wants to raise $8 billion by making wealthy seniors pay more for Medicare prescription-drug coverage, an idea lawmakers roundly rejected two years ago.

And lawmakers in both parties have panned his proposal to raise nearly half the money by limiting the value of itemized deductions for families who earn more than $250,000 a year. Those deductions can include mortgage interest, gifts to charity and state and local taxes; detractors say a tax increase could hurt charities, further depress the housing market and unfairly target residents of high-tax states.

Taxing employer-provided health benefits has not proven politically popular, either. The Democratic Congress summarily dismissed the idea two years ago when President George W. Bush included it in his budget request. Many senior House Democrats continue to oppose the idea, arguing that it could be catastrophic at a time when companies are scaling back coverage for their workers and dropping it completely for retirees.

"I would caution against doing anything that would undermine existing coverage for the individuals who receive their health coverage from their employer," Rep. Pete Stark (D-Calif.), who chairs an important health subcommittee, said yesterday.

Many economists and tax analysts have long argued for changing current tax law on health coverage, which disproportionately benefits wealthier workers. The law encourages people to enroll in the most comprehensive health plans on offer, the so-called Cadillac plans that provide vast coverage, mask the true cost of health care and contribute to skyrocketing costs.

Many lobbyists and others involved in the health-care debate say they see few other places to go for the kind of money that will be needed to meet Obama's demand for ambitious change. In their view, the question is not whether employer benefits will be taxed but how much of the benefit will be spared.

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