The administration had a good idea and let it go. The first version of its tax simplification plan last November would have taxed employer-paid health insurance premiums in a way that was surprisingly lucrative yet eminently fair, and might have helped hold down health care costs in the bargain. Now comes the new version of the plan, which would also tax insurance payments, but much less deftly. It would raise less money, less fairly, and without the good effect on costs.
Employer-paid health insurance premiums are now exempt from tax, one of a number of common fringe benefits not counted as income. The value of the exemption -- its cost to the Treasury -- is estimated at $28.2 billion this fiscal year. That benefit will go disproportionately to taxpayers in the middle-and upper-income ranges. It is about $5 billion more than the government will spend in the year on Medicaid, the health care program for the poor.
The administration's original plan was to "cap" the exempt status of health insurance premiums by counting as income and taxing employer payments to the extent they exceeded agreed-upon cutoffs -- $70 a month for single persons, $175 for families. This was fair in two respects. Wages and fringe benefits both are compensation; if one is taxable, so should the other be, so that people in similar circumstances are similarly treated. The cap also had the virtue of tending to fall most heavily on people with above-average incomes because they are usually the ones with above-average health insurance. Only about 30 percent of those with employer-paid health insurance would have been affected. The proposal would nevertheless have produced about $8 billion for the Treasury in fiscal 1988, and nearly $12 billion by fiscal 1990. Finally, and most distinctively, the cap was thought likely to have a restraining effect on inflation in the health care field because it would make people more cost-conscious. A cap, it was said, could be a deterrent to ever more generous health care plans and too-easy resort to doctors and hospitals.
Organized labor objected, however. The tax-exempt status of fringes is the working man's tax break, important to unions. The health insurance industry also objected, and the new chairman of the Senate Finance Committee, Bob Packwood, said he thought fringe benefits were taxed about right the way they are.
The administration then came up with its new plan. Instead of just those with the most insurance paying, everyone with any insurance would pay. The government would tax as income the first $10 a month that an employer paid in health premiums for a single person and the first $25 for a family. Less money would be raised -- only about $4 billion by 1990. Relatively more of the burden would be borne at lower income levels. And there is no discrimination among insurance plans; as Sen. Dave Durenberger, also a member of Finance and chairman of its health subcommittee, observed, the new proposal "hits even the most modest health plans and does nothing to discourage the extravagant ones."
Fortunately, there's an easy solution. It comes ready-made from the administration: the cap. Congress should go back to it.