Last week’s White House meeting on health care reform re-floated the idea of taxing employer-provided health benefits to help pay for insuring the uninsured. Sen. Max Baucus (D-MT), chairman of the powerhouse Senate Finance Committee, told reporters after the meeting that the president “might consider” taxing some employer-provided benefits, even though President Obama “‘made it very clear’ that he preferred his own revenue proposals,” according to the New York Times.
The idea of taxing health benefits has drawn strong support from many progressives. Eyeing the potential to raise $680 billion in revenue over five years (the health benefits tax exclusion now dwarfs the home mortgage deduction, whose repeal would only raise $444 billion over the same period), the liberal Center for Budget and Policy Priorities issued a new report calling for limiting the health care exclusion because “universal coverage may be out of reach otherwise.” Jon Cohn, writing in his debut Kaiser Health News, column, endorsed the idea earlier this week with a slap at unionized workers “whose employers give them blue-chip coverage.”
But are there really a lot of Cadillac plans out there? That gratuitous slap ignores the reality of today’s insurance marketplace. Employer-based plans pool risk for members of that plan only. Whom do you think has the high-cost “blue-chip” health insurance coverage — a newly opened, foreign-owned auto assembly whose average employee is 35 years old and has been hired because of his perfect health, or a General Motors plant whose average worker is 55 and has suffered through the stress of multiple layoffs and multiple plant closing threats over the past two decades? The only thing “Cadillac” in the health insurance costs of that GM worker is the nameplate of the car rolling off the assembly line. His higher premiums are a direct function of he and his co-workers’ higher claims, not more generous benefits.
In pushing for removing the tax deduction, the CBPP report at least pointed to the necessary adjustments that would have to occur to make the new tax truly progressive. High-cost groups would have to be protected by not allowing insurance companies to set higher prices based on either an employer’s size (thus protecting small business, which usually has higher rates because of higher administrative costs) or the health status of a firm’s employees. This is called community rating, which can only be enforced by a strong regulator.
The exclusion’s removal would also have to take geographical variation into account. Making the insured pay higher taxes because they live in areas with high health care costs punishes the victim, not the beneficiaries of those higher health care expenses, which are hospitals, physicians and medical suppliers who collect the fees for the often useless procedures offered in high-cost areas.
The idea of removing the income tax deduction as a way of raising revenue for insuring the uninsured has just one compelling argument behind it. It’s a form of progressive taxation. Because tax rates are higher on higher income, the tax exclusion for health benefits is much more valuable to high-income employees than low-income employees. Removing the exclusion only for those with high incomes would amount to a progressive redistribution of income from the upper class to the working class, good economics because of the unequal distribution of income in our society, but very bad politics. Taxing the rich to pay for a new entitlement — universal health care — may appeal to liberals and the left, but can be easily attacked by opponents of reform.
Indeed, couple its redistribution effects with the likelihood that Congress will be reluctant to impose tight regulation of the insurance industry and cost-control measures to offset geographic variation, repealing the health benefits tax exclusion could engender an angry backlash from already insured workers. I can already see the next round of Harry and Louise commercials, funded by opponents of reform. The 85 percent of working Americans who are privately insured will be told ad nauseum that the only benefit they’re going to get from health care reform is a higher tax bill on top of their already skyrocketing co-pays and deductibles.