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Paying for Health Reform
President Obama is avoiding one of the best options.

Tuesday, May 19, 2009

WHAT IF there were a way to pay for expanding health coverage that would also help hold down health-care costs and be fairer to low-income Americans than the current system? You'd think that President Obama would leap at this opportunity. Well, there is such a way. Unfortunately, Mr. Obama campaigned against it -- and for that and other political reasons, he is reluctant to embrace it or at least to be seen as taking the first step toward such an embrace. An important paper released yesterday by the Senate Finance Committee underscores why Mr. Obama should reconsider.

The funding source is the tax-free treatment of employer-provided health insurance: Unlike wages, health coverage is not subject to income or payroll taxes. This exclusion is the single largest subsidy in the tax code; it is projected to reduce federal tax revenue (both income and payroll taxes) by more than $200 billion next year. This arrangement is not only costly, it is also unfair. Because higher-paid workers are taxed at higher rates, they enjoy a larger benefit from not having to pay taxes on the health insurance they receive. Furthermore, the exclusion is counterproductive: tax-free health benefits encourage employers to provide more compensation in the form of health insurance and encourage insured individuals to use more health care than they would if they had to pay with after-tax dollars. The result is higher health-care costs.

It's not necessary to eliminate this tax preference entirely -- as Arizona Sen. John McCain urged during the presidential campaign -- to obtain significant revenue to pay for health reform. Rather, as the Senate committee outlined in its paper, capping the exclusion -- subjecting benefits to taxation but only over a certain dollar amount, or, less productively, in our view, over a certain income threshold -- could produce significant sums while avoiding the destabilizing effect of eliminating the exclusion. For example, taxing benefits above the current average cost of about $13,000 for family coverage would generate $1.1 trillion over the next decade, according to calculations by the Tax Policy Center. However, especially because premiums rise so sharply, setting that cap at a fixed amount would quickly erode the value of the tax exclusion. Instead, the cap could be set to rise at the rate of health-care costs (saving $165 billion over 10 years) or at the generally slower rate of inflation (saving $848 billion.)

Dealing with the tax exclusion is not the only possible funding source for health-care reform, but it is one of the biggest. The president's proposal to reduce the value of charitable deductions for the highest-income taxpayers remains sensible if not politically popular. Len Burman of the Tax Policy Center urged the panel to consider a value-added tax to pay for universal coverage. On a smaller scale, the excise tax on alcohol has not been raised since 1991; merely adjusting it for inflation would raise $5 billion annually. Taxing high-sugar soft drinks could simultaneously raise revenue (more than $10 billion annually at a tax of a penny per ounce) and improve public health by reducing obesity. Expanding coverage is important; so is paying for it. The more revenue sources left on the table at this point, the better the likely outcome.

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