Taxation of employe health benefits is far from the biggest dollar-item in the Reagan administration's current tax plan -- but it's one of the most controversial.

It's a political hot potato because it affects so many -- some 85 million American workers get employer-paid health insurance as a fringe benefit. A lot of voters who wouldn't know a mineral depletion allowance from an accelerated depreciation schedule have no trouble recognizing a health insurance premium.

The latest Reagan tax proposal, now being considered by Congress, would count as taxable income the first $120 an employer pays in health insurance premiums for an individual, and the first $300 for a family.

Such premiums -- the most widespread employe benefit -- are now tax-free. Congress specifically exempted them from the income tax in 1954.

The Reagan plan to tax employe health insurance benefits up to $250 a year for a family is a turnaround from the Treasury Department's original tax reform package released last November. The original plan, dubbed "Treasury One," would have taxed only the most expensive health plans -- those worth at least $940 a year for an individual or $2,100 for families.

Treasury One would have affected only about 30 percent of workers; the rest would have fallen below the cutoff. The new Reagan tax plan would affect all workers with employe-paid health insurance.

In sending his tax plan to Congress last month, President Reagan called it "a model of fairness, simplicity, efficiency and compassion." But critics say the proposal to tax health benefits is regressive and would do little or nothing to curb health costs.

"It's a bizarre mixture of bad economics and bad politics," says economist Jack Meyer, director for health policy at the American Enterprise Institute. "The problem with this proposal is it takes a good idea and turns it on its head."

Unlike Treasury One, which would have put a "ceiling" on tax-free health insurance, the new plan, called a tax "floor," hits people with low health benefits as well as those with generous plans, Meyer says.

"It's regressive and it vitiates the intent of the original proposal, which was to send a message to the American people that if you want a little bit extra in health insurance that's fine, but you've got to pay a little bit extra for it," Meyer says.

"The president has turned the Treasury proposal upside-down and turned a sensible idea into a silly one," says economist Henry Aaron, senior fellow at the Brookings Institution. "I don't think it has any rationale at all, except it raises $3.5 billion."

The health insurance industry opposes any taxation of health insurance benefits. Such a tax, says the Health Insurance Association of America (HIAA), "dismantles the economic safety net provided to American workers by private enterprise."

"If it's supposed to be fair and simple," says Jim Dorsch, Washington counsel for HIAA, "all I can say is, it isn't simple and it isn't fair."

The public also overwhelmingly opposes taxation of employe health benefits, according to a Roper survey released earlier this year. Seventy-nine percent of Americans said partial taxation of employe health benefits was "unacceptable," even if it would lower overall tax rates.

Opponents of the tax on employe benefits also worry that the relatively small boost in taxable income in the Reagan plan -- $120 for an individual and $250 for a joint return -- is merely a "foot in the door."

"If you can put the tax in, once you get it in, it's so much easier to raise it," says Dorsch. "You know they're not going to go through all this for a lousy $10 a month for an individual . It's a down payment."

Congressional sources and observers say the Reagan administration's reversal on how employe health benefits should be taxed occurred because of the adamant opposition of Sen. Bob Packwood (R-Ore.), chairman of the Senate Finance Committee, to the original plan.

"The president couldn't afford to be blasted out of the starting gate by Senator Packwood," says Brookings economist Aaron.

Treasury Department spokesman Brian Benson acknowledged that the revised benefits-tax proposal is an "upside-down version" of the original, but he refused to comment on widespread reports that the revision was part of a deal with Packwood.

A limited tax on health insurance benefits, Benson says, fits the Reagan administration's dual goal of broadening the base of taxable income "without jeopardizing the national policy of encouraging health care services."

But congressional critics say the Reagan plan would do nothing to contain health costs or encourage workers to choose less costly health insurance plans. Sen. David Durenberger (R-Minn.), chairman of the Senate Finance Committee's subcommittee on health, advocates an approach closer to the original Treasury One tax on "marginal" health benefits beyond a specified ceiling.

"If you tax at the margin, you're going to be getting at the extravagant plans," says Chip Kahn, Durenberger's chief aide on health issues. "If you tax at the base, you get everybody."

"The Reagan proposal, in terms of tax policy, is regressive," Kahn says. "In terms of health policy, it will have no effect at all."

Although the latest Reagan plan to tax employe health benefits has few supporters, there are political pressures favoring it. For one thing, with the federal deficit looming, both the administration and Congress have agreed that any tax reform must be "revenue-neutral" -- with no net loss of revenue. If the benefits-tax were dropped, therefore, lawmakers would have to find another way of raising $3.5 billion.

Packwood still nominally opposes taxation of health benefits, but is willing to go along with the latest Reagan proposal as "a very, very moderate way of raising some revenue," says Sam Richardson, an aide to Packwood. "If this is the least onerous thing we can get, then it's what we can accept."

The business community generally opposes taxation of health insurance benefits -- either Treasury One or the current Reagan plan -- because it would dilute one of the most popular employment benefits and add to administrative burdens. But the current across-the-board Reagan proposal is less offensive than the original Treasury proposal to most employers because it would be easier to administer.

(Also, the business community is much more worried about other provisions in the Reagan tax plan, such as curtailed depreciation and repeal of the investment tax credit.)

If a tax bill makes it through Congress this session, predicts Dallas Salisbury, president of the Employee Benefits Research Institute, there's "better than a 50-50 prospect" that it will contain a tax on employe health insurance benefits.

A "floor" on tax-free benefits is more likely to win approval than a "ceiling," Salisbury says, partly because its effect would diminish with inflation. Opponents might rationalize supporting it as part of a tax-reform compromise by saying that in the coming years, the taxable limit of $120 per individual and $300 per family would appear smaller and smaller. With a "ceiling," however, more and more workers would be taxed as health benefits grew with inflation.

"That," says Salisbury, "is a concern of every one of these interest groups."