The inequity of the deductibility of employer-sponsored plans
Job-sponsored health plans may be targeted for taxation
By Kevin G. Hall (Knight Ridder Newspapers)
CentreDaily.com
Jul. 13, 2005
For 60 years, American workers have received job-sponsored health-care benefits that are excluded from income and payroll taxes, but now they’re in danger of taxation.
An odd coalition of groups from both the right and left wants to tax those benefits, and a special presidential commission is weighing whether to recommend ending their tax exemption when issuing its report Sept. 30 on how to overhaul the tax system.
Left-leaning advocates call for ending the tax exclusion for job-sponsored health benefits in the name of fairness. They think the benefits are an invisible tax break for wealthier Americans that’s unavailable to poorer ones, who generally don’t get job-based health insurance.
“The tax break is regressive because people at the lower-income brackets get less benefit. It does just the opposite of what it should,” said David Kendall, a senior health-policy analyst at the Progressive Policy Institute in Washington.
Some right-leaning advocates think the tax exclusion for job-sponsored health benefits should end because it distorts the free market. The Heritage Foundation, a conservative policy-research center, says the exclusion leaves consumers in the dark about the real costs of health care, leading them to make uninformed decisions that ripple through the health-care economy, driving up costs.
Advocates on left and right agree on this: Ending the tax exclusion should be accompanied by a new national tax-credit system for health care.
“The mechanics of doing it don’t have to be revolutionary,” said Mark Pauly, an expert on health-care costs at the University of Pennsylvania’s Wharton School. “The main problem now is that the exclusion makes expensive insurance look cheap.”
http://www.centredaily.com/mld/centredaily/news/politics/12124748.htm
Comment: The deductibility of employer-sponsored health coverage represents regressive tax policy. It is blatantly unfair that taxpayers are reducing the cost of health insurance for higher-income individuals while making lower-income individuals pay much more (or accept stripped-down policies that fail to provide adequate financial protection).
But what would happen if the tax deductibility were eliminated in the absence of comprehensive reform? Employers are already looking for a way out of the health insurance quagmire. Even though insurance is part of the employee benefit package, losing deductibility would increase the employers net cost, assuming that employees would demand increased compensation to offset the loss of this tax benefit. Turning the rheostat up on the business community’s call for a “national solution” would be deafening.
So we can’t end the deductibility of employer-sponsored coverage until we are ready to enact comprehensive reform, but should that reform be tax credits? Tax credits would be a gift to the insurance industry. As premiums become less and less affordable for employers and for individuals, tax credits could be used to support the insurers’ market. If the tax credits are adequate to be certain that premiums are affordable and benefits are adequate, then the cost to the tax system would be far greater than the current tax loss through deductibility of premiums.
It is very unlikely that this is what conservatives have in mind. President Bush’s $1000/$3000 proposal would be grossly inadequate for moderate- and low-income individuals and would make health care unaffordable for the majority of Americans. Conservatives have suggested means-tested tax credits, but if these were large enough to be effective, then again the cost to the tax system would be inordinately high. Furthermore, it would increase the administrative complexity of our very wasteful system without providing any improvement in the functioning of our fragmented system of funding care.
What the conservatives do have in mind is a tax credit system that is affordable to the taxpayers. Small tax credits will buy small plans. Small plans will empower health care consumers to be prudent shoppers. They will be empowered to spend the money that they don’t have on whatever care nothing will buy. We must admit, that would certainly be effective in reducing health care spending.
We can get rid of the inequitable, regressive tax policies of employer-sponsored coverage, but not by compounding our problems through a system of tax credits. If we really want an equitable system that would ensure affordable access to comprehensive services for everyone, then we need to enact a program would work: a single payer system of national health insurance.