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Saturday, November 7, 2009

Health care reform and our tax law

Health Care Reform Needs to Reach the Buried Treasure

Much of the current health care debate is about how to provide coverage to everyone. Current reform proposals would cost about $100 billion annually and will drive up deficits for years. Meanwhile, buried in our tax system are billions of dollars of health care benefits that go to a select group. Why is there no reform plan with a smaller price tag that doles out more equitably the federal dollars going to this select group?

The select group? Employees with employer-provided health insurance. Despite the fact that employers can deduct their costs of providing that insurance, the employees are not required to report it as income.

For example, if Jane's employer pays $10,000 for her health insurance, Jane does not have to treat that benefit as income. If Jane is in a 35% tax bracket, the benefit to her is a $3,500 lower tax bill. But really, Jane is even further ahead because she did not have to write a check for the $10,000 of insurance coverage. Asking Jane to pay tax on even half of the insurance benefit she gets is still a great deal for her (she'd get $10,000 of coverage at a cost of $1,750).

At about $117 billion per year, this special rule is one of the most expensive tax breaks in the federal tax system. This special rule benefits only the 60% of individuals with employer-provided health care coverage. Because this benefit is part of the tax law, it's cost is buried. You won't see any federal agency with an expenditure of $117 billion for issuing payments to individuals to subsidize their health insurance premiums.

Reducing this tax break would free up funds that could be used to provide a government benefit to everyone. Change would also make the system more fair by treating employees with employer-provided insurance similarly to individuals who must purchase their own insurance. For example, the health care benefit could be included in wage income with a capped deduction or tax credit for health insurance available to all individuals whether they buy the insurance on their own or get it from their employer.

The current reform plans are too expensive and it is wrong to ignore the buried treasure that could be dug up and used to reduce the cost as well as to spread federal health care dollars more equitably.

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