Tax on Medical Benefits Gains Traction

By Lori Montgomery
Washington Post Staff Writer
Friday, May 22, 2009

A new tax on employer-provided health insurance is emerging as a likely option to finance an overhaul of the nation's health-care system, key Democrats say, despite opposition from organized labor and possibly the Obama administration.

Critical details have yet to be resolved, including whether to tax the benefits of all workers regardless of income and what portion of their employer-paid insurance premiums to tax. But the idea won a surprising degree of acceptance during a closed-door meeting of the Senate Finance Committee this week, according to several people present. And once-fierce opposition among House Democrats is softening as lawmakers confront their limited options for raising the estimated $1.2 trillion that will be needed to pay for reform over the next decade.

"There's a strong sentiment that still exists in the House" against taxing employer-provided benefits, said Rep. John B. Larson (D-Conn.), a member of House leadership who sits on the tax-writing Ways and Means Committee. "But we understand how important it is to get a package through."

Implementing such a tax would create a tricky political situation for President Obama, who last year spent millions on campaign ads that harshly criticized a similar idea advanced by his Republican opponent, Sen. John McCain of Arizona. But while continuing to express opposition to the proposal, White House officials have repeatedly stated that all financing options are on the table. And some Democrats are already calculating how to explain a reversal.

That task may have been made easier this week when congressional Republicans proposed using the tax to finance their own health-reform blueprint, lending the idea a bipartisan stamp of approval.

Excluding employer-provided benefits from taxation "is one of the distortions in the health-care marketplace that needs to be fixed," said Rep. Paul D. Ryan (R-Wis.), one of the plan's authors. "It was put in place in the mid-20th century when everyone had the same jobs for most of their lives. And we don't live like that anymore."

According to U.S. Census data, 177 million Americans received health insurance from their employers in 2007, the most recent year for which data are available. Nearly two-thirds of people under 65 have at least some of their insurance premiums paid by their own employer or that of a family member.

Under current law, those benefits are not taxed as income, one of the largest loopholes in the U.S. tax code. If the loophole were eliminated, congressional tax analysts estimate that the IRS would have collected an extra $133 billion last year alone.

Senate Finance Committee Chairman Max Baucus (D-Mont.), who expects to unveil health-reform legislation next month, has said he is not interested in closing the loophole, but in establishing limits. Among the options: Taxing only the benefits of high-earning individuals who make at least $200,000 a year ($400,000 for families). Or taxing benefits for all workers above some pre-set amount. One figure under discussion is $13,000, the national average value of employer-provided coverage for families.

Both options have disadvantages. Taxing only wealthy families, for example, "doesn't make sense," said Sen. John F. Kerry (D-Mass.), because it would raise too little money -- only about $160 billion over 10 years, according to Finance Committee aides. But "you've got to be very careful how far you go" down the income ladder, Kerry said. "If you come down too low, you're impacting workers and threatening the employer-based system."

Some Democrats are particularly concerned that the tax would fall heavily on union members, who tend to have generous health packages sometimes derided as "Cadillac" plans. But those plans are expensive because they include dental and vision benefits, large provider networks and low co-payments -- "things every American wants and should have," said Richard Kirsch, national campaign manager of Health Care for America Now, a coalition of unions and community organizations. Kirsch yesterday endorsed an alternative tax plan drafted by Citizens for Tax Justice that would target corporations and the wealthy for $1 trillion in tax increases over the next decade.

Capping employer-provided health benefits would generate around $500 billion over the next 10 years, by various estimates, and key Democrats say it may be the only politically viable option for raising that kind of cash.

"Everyone hates it," said a member of the House Ways and Means Committee, speaking on condition of anonymity because he has yet to discuss the issue with his colleagues. "But where else do you go?"

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