Finding Appropriate Tax Dollars for Health Reform

President Obama's revenue proposals for FY2010 released on May 12, 2009 (the "Greenbook") include 30 revenue raising proposals where the taxes generated are to be dedicated to the "Health Reform Reserve Fund." It is estimated that over 10 years, these 30 provisions will generate $325.6 billion. These 30 proposals are a wide gamut of provisions including capping the tax benefit of deductions of high income earners at 28%, new information reporting requirements, new enforcement tools, new penalties, repeal of LIFO, and estate tax modifications. It does not appear that any of the 30 revenue-raising provisions are related directly to health care. (The list of specific provisions can be found on pages ii - iii and 130 of the Greenbook.)

I find this approach troubling for two reasons:

1. The current tax rule that exempts the value of employer-provided health insurance from income (even though the employer takes a deduction for it) is a very generous provision of our federal tax system. The Joint Committee on Taxation estimates that for 2007, the exclusion resulted in a cost to the income tax system of $145.3 billion plus $100.7 billion to the Social Security system. Why are we ignoring this tremendous tax expenditure and ignoring the reality that federal dollars, via this exclusion, are being spent to favor employees with employer-provided health insurance while the government struggles to find dollars to help more people be insured. The dollars spent on the generous exclusion could be used more equitably to benefit more taxpayers. One approach would be to require high income individuals receiving the benefit to pay tax on part of that benefit. This should still make the benefit worthwhile (such that they would be unlikely to cancel their health insurance thereby jeopardizing the employer's ability to afford health insurance for all employees). President Bush had proposed eliminating the exclusion and replacing it with a standard deduction to also help cap the dollar amount of the benefit employees receive. A starting point towards bringing employees (the insured) into health care spending decisions would be to at least start having high income employees pay tax on a portion of their benefit. Also, the benefit is worth a lot more to high income individuals because they are in a high tax bracket.*
2. If a tax change is going to be earmarked to generate funds for a specific purpose (other than increasing the General Fund), there should at least be some connection between the items changed and the program to be funded. For example, if gasoline excise taxes were to be increased to fund the Highway Trust Fund, that would make sense.

* Note - the exclusion for employer-provided health insurance is a tremendous benefit because the employee never comes out-of-pocket to pay for anything. For example, if Amy's employer pays $10,000 of her health insurance annually, Amy saves a $10,000 outlay that she would otherwise have to make if she bought her insurance on her own. If Amy had to pay tax on 10% of this benefit and is in the 35% tax bracket, she would pay tax of $350 ($10,000 x 10% x 35%). She still gets a tremendous benefit because she gets $10,000 of coverage and it only costs her $350.

There have been hearings on various aspects of health care reform and the tax law. Several people testifying have noted concerns about reducing the health insurance exclusion as it may lead to some employers dropping plans and increases in the number of uninsured. People have also noted flaws in the health care system that need to be addressed because they increase costs for employers and individuals purchasing insurance.

Certainly, there are issues that need to be addressed in health care which cause us to have such high costs without the highest quality health care relative to other countries. I hope the discussions do look at other models of health care that don't tie it to employment and requiring employers to purchase health insurance for employees. We are entering an era of employees not tied to a single employer for their entire career and I think we'll see more individuals be self-employed entrepreneurs. Their health insurance costs will always be high due to the tremendous federal subsidy via the tax law that goes to employees getting health care coverage from their employers. Also, if other countries don't use our model, US employers face greater costs of doing business which will hurt their ability to compete in the global economy.

Health care reform is not easy due to the many broken pieces we currently have including inequitable government subsidies, the reliance on an employer-provided system that exists due to the historic artifact of wage controls in the 1940s, and an unwillingness to be more transparent, overt and focused on the need to generate at least some of the funds for health care reform from the current subsidy. Also note that the current tax subsidy for employer-provided health care is 8 times larger than what President Obama expects to raise from the 30 tax increases. This means that even a relatively small change in the subsidy - and even just for higher income individuals, would be sufficient to cover what he needs for the health care reform reserve fund.

I hope we can move to a more honest effort to generate funds for health care that include finding ways to reduce costs and to spread tax dollars more equitably to benefit more individuals. Let's start with connecting new funds for health care reform from the existing generous subsidy for health care.

What do you think?