Tax on Health Benefits Weighed

Max Baucus, chairman of the Senate Finance Committee, said that such a tax would be phased in over years.
Max Baucus, chairman of the Senate Finance Committee, said that such a tax would be phased in over years. (By Melina Mara -- The Washington Post)
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By Lori Montgomery
Washington Post Staff Writer
Wednesday, June 10, 2009

A Senate plan to overhaul the nation's health system is likely to include a new tax on some employer-provided health benefits that exceed the value of the basic plan offered to federal employees, currently about $13,000 a year for a family of four, the chairman of the Senate Finance Committee said yesterday.

Sen. Max Baucus (D-Mont.) said he is drafting the health reform measure, which he expects to unveil next week. He told reporters that taxing employer-provided benefits is "perhaps the best way to raise money for an overhaul of the health-care system" and offered details about the form that tax is likely to take.

Baucus said his proposal is likely to cap benefits at "a level higher than the actual benefit that members of Congress receive today." An employer-provided plan worth less than that level would remain tax-free, he said, while any benefit exceeding the cap would be taxed as ordinary income.

Such a tax, if adopted, would be phased in over "several years," Baucus said. And it would be likely to "grandfather" in health benefits set as part of a collective-bargaining agreement, he said, allowing union plans to remain tax-free until new contracts can be negotiated.

Baucus declined to say how much money the proposal would generate. The nonpartisan Joint Committee on Taxation estimates that taxing employer benefits above the value of the Federal Employees Health Benefit Plan, adjusted for inflation, would generate nearly $420 billion over the next 10 years -- a sizable chunk of the $1 trillion or more likely to be needed to expand coverage for the uninsured.

A higher cap and exemptions for unions would make the tax more politically palatable but would diminish the amount of money it would raise. Baucus said the sums under discussion remain "significant" but added that he is looking at a variety of other money-raising options, including Obama's plan to limit the value of itemized deductions for families earning more than $250,000 a year.

At a closed-door meeting of the Finance Committee last month, the Joint Committee on Taxation also provided estimates for repealing the tax deduction for certain large medical expenses ($180 billion over 10 years), a new tax on flexible savings accounts and health reimbursement accounts (about $70 billion over 10 years), a new 3-cent tax on sugary drinks (about $50 billion over 10 years) and higher taxes on alcohol (about $60 billion over 10 years). A more dramatic proposal -- taxing half of all employer-provided health premiums -- would generate $1.2 trillion over 10 years, according to a memo provided to Finance Committee members. Baucus's comments came after a lunchtime meeting of Senate Democrats at which lawmakers began hashing out the complex details of a health overhaul. "This is the first week of crunch time," said Sen. Charles E. Schumer (D-N.Y.). "This is the first day when, instead of looking at the car, we're starting to test-drive it."

Democratic leaders in both the House and Senate yesterday continued to trickle out details of proposals without saying how they would raise the money. The Senate Health, Education, Labor and Pensions Committee released an outline that would require the vast majority of businesses to contribute to workers' health costs and would impose tight restrictions on the practices of insurance companies. Like a developing House plan, it would include government-sponsored insurance for people who have trouble finding coverage on the private market -- an idea adamantly opposed by Republicans.

Staff writer Ceci Connolly contributed to this report.

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