Reforming Health Care by Taxing Health Care?

By Robert Steere, Toolkit Staff Writer

Pretend for a moment that you are a senior advisor to Congress. You have been asked to figure out a way to finance health care reform to provide affordable health care to all Americans. How long do you think you would remain a senior advisor if you jumped up and declared, "I've got it; first, let's eliminate the tax provisions that help reduce the cost of health care for millions and millions of Americans today."? Probably not long.

Reforming health care by taxing health care

Well, surprisingly, Senate Finance Committee Chairman Baucus and Ranking Minority Member Grassley made just such a proposal in their committee's report of policy options for financing comprehensive health care reform, released on May 18 and reviewed in committee on May 20. "Comprehensive health reform must also entail an examination of current health tax expenditures, with the goal of modifying, or perhaps limiting, these current expenditures," they said in their report. Specifically, they propose limiting the exclusion of the cost of employer-provided health insurance from employees' taxable income, limiting the tax-free treatment of Health Savings Accounts, limiting or eliminating the tax-free treatment of Flexible Spending Accounts, and further limiting or eliminating the itemized deduction for medical expenses.

Their report presents various options for changing the exclusion for employer-provided health insurance. Several options involve capping the excludible amount, either on the basis of the value of the insurance policy, the income level of the employee, or some combination of the two. Another option would reframe the exclusion so that it becomes either an individual tax deduction or tax credit in the future. Any option might include grandfathering the exclusions allowed under currently existing plans.

President Obama was apparently surprised by these proposals. A spokesperson for the administration said that the president made it clear that he has serious concerns about taxing health-care benefits, and that he is deeply skeptical of any reform that taxes health benefits. Various labor organizations simply expressed anger that the committee would be considering eliminating the exclusion or any part of it. Employers and unions alike are concerned that limiting the exclusion would destabilize the current system of employer-provided insurance.

The report provides some useful data regarding the tax subsidies, preferences and incentives (called tax expenditures) currently included in the tax code to help Americans with the costs of health insurance and medical care. The health care tax expenditure list compiled in the report totals $194.2 billion for 2008, constituting the single largest category of federal tax expenditures. However, it states that the $194.2 billion does not even tell the whole story. "The current tax preferences for health care benefits also reduce payroll taxes by an additional $93.5 billion in 2008," says the report. "Combined, total tax spending on health care amounted to $287.7 billion in 2008."

The exclusion of employer-sponsored health insurance from an employee's taxable income topped the tax expenditure list at $132.7 billion. The exclusion of Medicare benefits from recipients' taxable income was next at $40.6 billion. The itemized deduction for medical expenses followed at $10.7 billion, and the deduction for self-employed health insurance was next at $5.2 billion.

Reforming health care by taxing unhealthy lifestyles

Also targeted in the report are two "lifestyle-related revenue raisers" (we used to call these "sin taxes") as sources for financing health care reform. The principle behind these proposals is that things that are harmful to general good health should be taxed for the benefit of health care reform. Thus, our lifestyle of pleasure drinking, whether hard or soft, is under attack. One proposal standardizes the excise tax on all alcoholic beverages (beer, wine and spirits) at a higher rate. The current tax rates of 8, 10 and 21 cents per ounce of alcohol for wine, beer and spirits, respectively, would be unified at 25 cents per ounce of alcohol - a 20 percent, 250 percent or 300 percent increase in the tax, depending on your taste in alcohol.

Another proposal imposes a brand new excise tax on soft drinks that are loaded with sugar, though the proposed tax rate is conspicuously absent. The authors of the report suggest that the two proposals are intended to promote wellness and healthy choices, and curb activities that increase overall health care costs. In reality, the true purpose of the proposals - raising revenue for health care reform - is better served from unchanged drinking habits and the continuing production and consumption of these "unhealthy" products.

What does all this mean?

This report highlights the continuing pressure on Congress to find new sources of revenue to finance the priorities of the new administration - in this case, health care reform. Congress is looking in all directions. First, it targets for removal the one tax benefit (exclusion of employer-provided health insurance) that for years and years has helped the most Americans cover the cost of their health care. Next, it offers proposals for new and higher taxes on so-called unhealthy lifestyles, like the alcohol and soft drink taxes. Congress may be grasping at straws, as opponents will come out of the woodwork to attack every imaginable tax increase. But this is a time for all of us to be alert to the changing tax landscape, and to the potential for new tax obligations to be imposed. Every new program has a price, and ultimately, someone must pay. The Senate Finance Committee presented many options in its report the program of health care reform. But, rest assured, in the end we taxpayers will be given the bill.

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Posted May 21, 2009.