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The case for taxing health benefits

From commenter Brad Gabel:

Here's the case for taxing some health benefits:

I have a 45 percent marginal tax rate (federal, FICA, Medicare, and state) and a 10-year-old diabetic child. In other words, because I get my health insurance through my employer, Uncle Sam, the employer exclusion subsidizes 45 percent of the cost of my health plan.

The waitress at the local diner who served you and me breakfast last Sunday morning also has a 10-year-old diabetic child. Unfortunately, her employer doesn't offer her health insurance, so she gets no tax subsidy (except the paltry medical expenses deduction) when she goes to ehealthinsurance.com, and purchases health insurance for her and her 10-year-old diabetic child.

In other words, the waitress's tax dollars are subsidizing my health insurance. Does this seem fair?

By Ezra Klein  |  October 20, 2009; 3:49 PM ET
 
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Comments

It gets even better.

Many mid-size employers (150 to 2,000 employees) now pay 50% of health insurance costs, with employees paying the remaining 50%. Many, if not all, of these employers simply can't pay the remaining 50%, so will both drop employee health insurance coverage and reduce employee wages to cover the penalty amount. Employees can always seek (but are unlikely to find) employment elsewhere, they could attempt to unionize to get a "union discount" on insurance coverage, or they could use the new insurance exchanges.

At first glance, it's a win-win: the employer is [implicitly] driven out of the insurance picture, the exchanges get business, and paying employees get as much insurance coverage & health care as the non-paying souls living on the streets. The wage cuts aren't a tax, so nobody can complain to Congress. Some really nifty "legislative language" even helps make increased unionization unlikely.

Who could possibly complain!

Posted by: rmgregory | October 20, 2009 4:03 PM | Report abuse

Brad, let's really be fair, and outlaw employer plans and let everyone purchase their own insurance. Then the Gov't can be what it always is "fair" and give everyone an equal subsidy.

Posted by: lawman1 | October 20, 2009 4:06 PM | Report abuse

What do you think are the odds that her father is a union member? or her grandfather, or the father or grandfather of her husband?

The unions are not acting in the best interests of their members in opposing this tax and quite possibly diminishing the quality and generosity of universal health care.

And do they think that their union members can never lose their union jobs and won't badly need a generous universal healthcare program? Have they been paying attention to the world today?

Posted by: RichardHSerlin | October 20, 2009 4:38 PM | Report abuse

Indeed. Putting this in stark relief for me was my recent realization that when I went on COBRA after being laid off this year, I wouldn't get any deduction for my COBRA payments. (No chance of hitting the 7.5% threshold for the medical expenses deduction.) Previously, the amount I paid for health insurance (via my employer) was 100% deductible above the line.

In effect, the Code is punishing me for having been laid off.

Posted by: PoorForm | October 20, 2009 4:38 PM | Report abuse

"...so she gets no tax subsidy (except the paltry medical expenses deduction) when she goes to ehealthinsurance.com, and purchases health insurance for her and her 10-year-old diabetic child."

Easy enough. Just make her self-purchased tax deductible.

Posted by: WrongfulDeath | October 20, 2009 5:36 PM | Report abuse

There's no way she could get insurance on the open market. Been there, tried that, kept us tied to a crappy job in a crappy city for years.

Posted by: AZProgressive | October 20, 2009 6:17 PM | Report abuse

Poorform....I am not giving tax advice here (check with your tax guy) but everything I understand about the code has COBRA premiums as includable towards the 7.5%.

Posted by: scott1959 | October 20, 2009 6:58 PM | Report abuse

There is no need to "outlaw" employer-paid plans, just stop discontinue the corporate tax deduction and let every taxpayer exclude premiums paid (to some limit) from his taxable deduction.

Posted by: Athena_news | October 20, 2009 7:01 PM | Report abuse

No, it's not fair. Provide a tax break for individuals that must buy their own insurance. I am surprised that you jump to a solution to tax all rather than tax none.

Posted by: sailor0245 | October 20, 2009 7:01 PM | Report abuse

BTW - we also overlook the medical expense reimbursement account benefit. I can pay my co-pays, medicines, etc all with untaxed dollars. This benefit does not apply to all, it should.

Posted by: sailor0245 | October 20, 2009 7:04 PM | Report abuse

Hey Ezra,

Thanks for citing my work. My old man, whose work on the CBO's notorious history of misprojecting health care savings you cited, gave me that argument.

I'm an actuary myself, although I'm in the life insurance industry. I'm amazed at your work, and you're 4.5 years younger than I am. You are by my favorite health care writer, although I also like Jonathan Cohn.

Anyhow, got to study for my next exam.

Brad, ASA, MAAA

Posted by: BradGabel2002 | October 20, 2009 7:16 PM | Report abuse

If those who oppose government run Health Care would really like to take the nation into a strong, free market approach to health insurance, lets do it with some gusto.

To start off with you remove the notion of employer provided health care entirely. Individuals become solely responsible for the review and purchase of health insurance all on their own, in the same way that we are responsible for our own automobile insurance (yet are required by law to have it), subject to the same legal recourse if you fail to get coverage. Every dollar spent on health care, including your insurance premiums, should then be made tax deductible, up to a certain limit as with all deductions. You could even take the limit defined in the excise tax and set that as your deductible limit.

At this point, every single person would be given the same government support, and simultaneously be forced to become aware and conscious of what their health care plans cost, what they provide, and this intense public scrutiny would force insurance companies to take a fresh look at how they structure their plans. Rather than huge bulk sales made by presenting to an employers human resources director, you now have to convince the average American that this plan is worth the price, or that it's okay to have a deductible this high given their situation.

If you really wanted, take it a step further and do the same with Medicare/Medicaid. People look for plans that fit within a government mandated segment (elderly/low-income specific plans) and those in the program then submit to the federal government to have their premiums paid.

Arguments saying that his cannot possibly work mean that you must accept the role of the federal government in the provision of health insurance, and really consider whether you like the idea of leaving our health up to companies whose main goal, as stated in corporate charters, is the bottom line for share holders, not the health of their customers.

Posted by: dav00r | October 20, 2009 8:33 PM | Report abuse

Ezra, I'm pretty disappointed that you have gone from rightfully mocking McCain's plan during the presidential to tax everyone's health insurance and then provide a tax credit for people to buy health insurance policies that will be worth less and less over time, but have now become an advocate for raising these taxes now that Obama is president.

Posted by: tyromania | October 20, 2009 10:56 PM | Report abuse

Seems to me the same argument can be made against the home mortgage interest deduction if she rents and you own a home?

Are you advocating ending the interest deduction?

Posted by: cautious | October 21, 2009 12:59 AM | Report abuse

Right on, cautious, the mortgage deduction analogy is perfect.

Before we end the full deductibility of employer health benefits, we need to at least give people a fair way to cash out. Otherwise this just undermines unions and professions where people have traditionally sacrificed wages for benefits.

Posted by: bmull | October 21, 2009 3:36 AM | Report abuse

YES, we most certainly should discontinue the mortgage interest deduction. It's a subsidy to the money class with benefits accruing mainly to the real estate and banking industry.

Posted by: Athena_news | October 21, 2009 9:42 AM | Report abuse

And cautious, I agree the mortgage and charitiable deductions should be made more progressive as well -- either through a credit or better yet phased out entirely. In return we could use the revenue to lower marginal tax rates and/or reduce the deficit.

Posted by: BradGabel2002 | October 21, 2009 12:06 PM | Report abuse

You people are coming up with such strawman arguments.

All I am saying is that we are going to spend $3.5 trillion over the next 10 years on the tax subsidy for employer-provided health insurance. Surely we can find a more equitable way to spend this money than the way we currently do.

One such way is Sen. Wyden's idea to replace the employer exclusion with a more progressive tax subsidy to purchase health insurance on the Exchange, and require employers who drop coverage to raise their employees' wages by their contribution to their employees' health insurance. Because this idea rewards employees who choose wisely, and doesn't subsidize overutilization, Sen. Wyden's subsidies and minimum level of coverage -- actuarially equivalent to BC/BS Standard Option (87 percent actuarial value) -- is so much more generous than that of any of the current bills. The House bill sets this figure at 70 percent; HELP sets this figure at 76 percent; Finance sets this figure at 65 percent.

Posted by: BradGabel2002 | October 21, 2009 12:17 PM | Report abuse

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