• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • Health Care Tax Policy: A Rare Opportunity for Bipartisan Cooperation

    Today The Washington Post reported that President Obama’s budget proposal to “tax the rich” to pay for health care, including reduced deductions for charitable donations, is “facing deep skepticism on Capitol Hill”. According to the Post, as an alternative, top lawmakers are pondering a change to the federal tax treatment of health insurance—a relic of the WWII era—as an alternative way to financing health reform.

    If there is one item where there is a powerful consensus among serious health policy analysts, conservative and liberal alike, it is the need to change the existing tax treatment of health insurance. It distorts the health insurance markets, undercuts consumer choice and competition and fuels higher health care costs. For two decades, the Heritage Foundation has been at the forefront in championing such reform. Tax reform should be the number one component of any major health reform worthy of the name. Without such reform, there would be no serious reform of the insurance markets or health care financing, just more of the same.

    Under current law, compensation in the form of health insurance is excluded without limit from the employee’s taxable income: that is, workers pay no income or payroll tax on their employer-sponsored health insurance. The Joint Committee on Taxation estimated this tax expenditure for employer-sponsored health care was $246.1 billion in 2007—the federal income tax and payroll tax components were $145.3 billion and $100.7 billion, respectively. This represents the largest federal tax expenditure and the third largest federal health care expenditure after Medicare and Medicaid.

    The current tax break is tied exclusively to employer based coverage, and workers without employer coverage get nothing. Worse, by driving up health care costs and undermining personal ownership and portability of coverage, it directly contributes to the growth of the uninsured. It is not only unfair and inequitable, it is also counterproductive. For these reasons, health economists of all political stripes – including some of President Obama’s top advisers – have long considered tax reform the fundamental component of real health care reform– to stem the rising tide of uninsured and contain rapidly growing health care costs. They would do this by replacing the existing tax exclusion on the value of health benefits with a national tax credit system, as originally proposed by Heritage analysts, or at least capping that exclusion, and creating an alternative system of health care tax credits.

    Although President Obama has not included such a tax reform in his health reform proposal, it is not too late. Senator Max Baucus (D-MT) has surfaced the case for change in his recent white paper, suggesting a cap on the current tax exclusion. Recent talks on Capitol Hill indicate there is still a possibility for a compromise on this vital issue. If President Obama and leaders in Congress are sincere about enacting, and responsibly financing, comprehensive health care reform legislation, and do so with broad bipartisan support, reform of the tax treatment might be the key ingredient for a far reaching improvement in the system. A proposal that gradually phases out the income tax exclusion– while phasing in a new system of tax relief– could be a promising addition to any serious health reform proposal.

    A crucial issue to be resolved is how the health care tax reform is to be implemented. Two key principles are essential. First, any revenue raised by taxing the value of health insurance benefits received through employers must be entirely used in new tax relief for taxpayers—in the form of a tax credits for individuals and families. The tax credits should only be available for people actually paying income tax and should apply to a large portion of a health plan’s premium, but not all of it. The credit must be designed in such a way that consumers have “skin” in the game, and thus advance, not retard, the cause of cost control. Second, for low-income Americans with no tax liability, or tax liability less than the value of the credit, there should be a “voucher” component. That direct health care subsidy for coverage can and should be paid for by reductions in other government spending in the budget; there are plenty of options. The health care voucher would then be available, either in full or in part, to low-to-middle income individuals and families who lack the resources to afford insurance but have little or no tax liability to offset.

    The convergence of the health care and tax reform offers a rare opportunity for serious bipartisan cooperation. It does not come about very often. Hopefully, the Obama Administration and the Congressional leadership on both sides of the aisle will not blow it this time.

    Posted in Obamacare [slideshow_deploy]

    10 Responses to Health Care Tax Policy: A Rare Opportunity for Bipartisan Cooperation

    1. Ozzy6900, CT says:

      Why in the world would any Republican want to be a part of an issue that has failed in every country that has tried it so far? I'll tell you why the Democrats want a bipartisan agreement. So they can say that it wasn't their fault when the Health Care System fails under the Democrat/Liberal plans. The Republicans should just walk away from this. Better to be blamed for not participating in the deed than to be blamed for it's demise.

    2. Jim Tomes says:

      There are two big problems with your proposal.

      You suggest replacing the Obama "tax the wealthy itemized deduction" proposal with a "eliminate health insurance dedution" plan.

      1) Not everyone with high priced health plans are wealthy.

      2) Obama uses his plan to "pay-for" health reform upfront costs. You however require all revenue to be devoted to futher tax reductions for health care. That would simply be a wash leaving no money for health reform.

    3. Pingback: Pages tagged "health"

    4. Janette Miller says:

      I make 42000 a year. We are a single income family. My employer pays over 14,000 a year for my medical insurance. If I am going to be taxed on the additional 14,000, thereby raising my income to 56,000 a year and thereby forcing my taxable income to new and higher levels,how can this in any way be helpful? All this is likely to do, is force me out of my health care system. This tax policy isn't going to increase the number of insured people. Instead, this additional tax is going to force many familes into the ranks of the uninsured!

      Government dances around what really needs to be done in this country. Go to a one pay system, like Canada and most of the European countries. In my own situation, if my health care benefits were to be included as part of my gross income, then it would represent 25% of my income. If I am taxed in full on those benefits, that represents approximately an additional 25% of $14,000 that I will have to pay for health insurance. For those of us who cannot itemize deductions, this is a huge amount of money out of our personal income. For my own personal situation, I am already considered at the poverty level in my state. How can this policy be helpful? This is absurd.

      My plan: National Heath Care

      All doctors and all hospitals AND the Pharmecutical companies are limited to what they can charge for their services and medications. Period. No more discussion. You don't like it, practice someplace else.

      Everyone pays 25% of their gross income for national health coverage.

      All insurace tax dollars are funneled to the national health care fund, which pays for services.

      If we didn't get charged $40 for ace bandages when we go to the hospital emergency room, if we didn't pay $500 for just showing up to the emergency room, we would have much cheaper insurance rates. But increasing personal income tax for health care benefits without forcing substantial limits on medical costs, is not going to do anything but place additional tax burdens on many people who cannot afford it.

      The United States needs to step up and do the right thing. We should cease all private insurance, go to the one pay system, like Canada and most of the European countries, and stop all of this stupidity. Everyone wins in that system. Doctors can still make a very good annual income, and everyone will have health care coverage. Everyone, regardless of income, is charges a flat rate for their insurance. So, if health care is 25% of your income, so be it. But, everybody pays the same amount and gets the same coverage.

      We can't continue to pay for outrageous medical costs and then, to boot, pay taxes on ridiculously priced health care insurance. We have to first limit health care costs, across the board. If we don't limit health care charges by physicians and hospitals, we will never fix the problem.

      If our politicians had the guts to do what is right, we wouldn't be in this situation. Shame on our Congress, our Senate, and our new President for proposing such an increase without a real change in the system.

      When are the American people going to rise up and demand real changes!

    5. Lynn B. DeSpain says:

      Its like Hillary Clinton's book, "It takes a Village to raise an Idiot!", or something close to that.

      An employer provides Health Insurance as a Benefit, not as pay. It is cheaper for the employers because of 'Group Rate', and good for the employee because they and the family are covered, without the costs coming out of their paycheck.

      Now, Oboober wants to not only remove the expense of providing the benifit from the employer, he wants the employee to pay tax on it.

      This is so that all of us can have sub-standard health care! Check Canada's on knee and hip replacemnt, if you are sixty or older, no can do, too old! Same thingwith by-pass surgeries! How about that 'Baby Boomers'!

      We have a lot of unemployed right now. We have a lot of people on various Socialized Programs. This Nation can solve the whole problem with just one move, send all the Illegals back home!

      Don't fall for the argument about, they do what American's won't. Stupid answer. First off, in California, 2% of Illegals work in the Agricultural industries. Secondly, my Wife and I and our children and our neighbors and their children picked beans and berries and produce for school money and to buy bicycles and things we wanted and it taught us "Work Ethics".

      The Government removed the right for kids to learn work ethics.

      Growing up I never heard of anyone being sued or suing anyone or anything, even and especially Medical! Now if a tissue irritates your nose, possible law suit! Let's change some of that while we're at it!

      It is time to shake up the game board and start over! Let us inform those we hire in D.C. and in our own State Capitals, just what it is that we want!

      We want Jobs. We don't want millions of square miles of land that you can only walk on. We do not care about a "Spotted Owl", let it die! Better it than people on welfare and food stamps. We don't care about "Sea Lions", kill them, there are millions of them, and they eat the Salmon that our Commercial Fisherman (Human Beings) harvest and feed their families and contribute to their communities. You shouldn't have to have a 'Permit' to shoot rabbits! Not the ones who are eating the farmers crops, reducing his income, and like the fisherman, being subsidized with welfare and food stamps!

      Check around people, no one any longer believes in "Global Warming", none of the weatherologist, climitologist, geologist, glacierologist, or any other reputable Scientist alive today! Drive all you want! Put the lead back in gasoline! It was only taken out to protect the person pumping it eight hours a day, five days a week! Besides there are only two States left where you cannot pump your own gas, and guess what? The gas is cheaper there, they wear personal protective equipment, and thousands and thousands more people are employed, than in the other forty eight States!

      Hozro

    6. Barb -mn says:

      REPUBLICANS PLEASE STOP SIGNING AMERICAN LAW, FREEDOM AND RESPONSIBILITIES AWAY!!!!!!!!!!!!!!! WE HAVE INVADERS (good word) in this state also, where government is appeasing, accommodating, catering all on our dime! While we're held accountable to their personal choice to break the law!!

    7. Pingback: Kaiser Daily Health Policy Report Feature Highlights Recent Blog Entries « Eclectic Buzz Blog

    8. Bart, California says:

      The first point to make about the employer exclusion is that it is a subsidy for group coverage as much as it is for employer-provided coverage. Removing the exclusion, or neutralizing it by making all health insurance eligible for the same treatment, would pull the rug out from under employer-provided group plans due to adverse selection. That's why the proposed reforms have never caught on.

      What could work would be to end the discrimination between employer-paid group insurance and other group or group-like insurance. Any tax credit should be restricted to policies that follow some of the same rules as employer group plans. For example, they must accept a certificate of continued coverage from for people switching between insurance companies, who have maintained coverage, and provide coverage at group rates (or class-average rates for a group-like individual plan).

      Without this qualification, don't hold your breath waiting for tax reform.

    9. Pingback: Principles Of Skin Care At Sixty | Australian Gold Sunscreen

    10. steve nyc says:

      we need to tax the rich to pay for heath care for the poor i propose the following

      a 45% increase on federal income tax for all persons making over $45,000 per year

      a additional tax of 60% for persons making over $100,000 per year

      a vat tax of 15% on gasoline

      a vat tax of 45% on all purchases

      a luxury tax of 60% and all luxury purchases including hotel rooms.

      we have to provide health care for all people in the U.S. including undocumented workers.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.

    ×