Obama Ready to Tax Benefits

By Dan Froomkin
12:00 PM ET, 06/10/2009

Responding to demands that he further explain where the money would come from to pay for his dramatic health-care overhaul, President Obama is said to be on the brink of endorsing the limited taxation of employer-sponsored health benefits -- benefits that have historically been tax free, no matter how generous and regardless of how much employees earns.

Even though Obama's plan would only tax benefits over a certain amount, it would still rate as his biggest reversal yet on domestic policy. During his election campaign, Obama strongly criticized his Republican rival John McCain for his proposal to tax all such benefits.

For comparison purposes, however, what Obama in one campaign commercial dubbed the "McCain Tax" and the "largest middle-class tax hike ever," would have raised $3.6 trillion in taxes over 10 years from people with bare-bones health plans and "Cadillac" plans alike. Congressional estimates suggest that taxing workers for the value of benefits above the current cost of the standard health plan for federal employees -- the plan Obama seems about to support -- would, by contrast, raise $418 billion over 10 years. Applying that cap only to individuals making over $100,000 or couples making over $200,000 would generate $162 billion.

All this is according to CQ. Adriel Bettelheim writes for CQ this morning:

Though the new tax would capture a significant number of middle-class workers, the White House is ready to endorse it, if the majority of lawmakers on the tax-writing committees sign on. And administration officials already are preparing a justification, by arguing that fixing the U.S. health care system is too important to founder on questions about how to finance it, according to officials familiar with the administration’s thinking.

Bettelheim points out that the move "risks triggering a huge political battle with labor unions concerned about losing their bargaining clout" as well as legislators "wary of antagonizing economically stressed middle-class voters." But, she writes:

Obama himself will begin make the case at a series of campaign-style appearances across the country, beginning with a town hall meeting on Thursday in Green Bay, Wis., and in private meetings with lawmakers....

White House officials will repeatedly make the case that the overall savings working Americans obtain from a revamped health system will trump concerns about paying taxes on health benefits.

This argument already has been dubbed “It’s all about the net,” meaning the net annual cost of health coverage, and reflects the administration’s bottom-line rationale for any substantial health care overhaul.

Richard Rubin wrote for CQ Sunday night about the early estimates from the Joint Committee on Taxation. The $418.5 billion in question, he wrote is

not enough to pay the full cost of expanding health insurance to all Americans, but it would make a significant dent in the estimated $1 trillion price....

The estimate assumes that the exclusion cap will be set at the cost of the “standard option” health plan for federal employees and then indexed annually for per-capita medical cost inflation.

Obama told Democratic senators last week that he’d consider taxing such benefits. Ceci Connolly wrote in The Washington Post at the time:

Tax treatment of employer-sponsored health care cuts across party lines: Prominent Republicans such as Sen. Judd Gregg (N.H.) support imposing a tax on certain health plans, while Democrats such as Sen. Sherrod Brown (Ohio) say that a tax would unfairly hurt middle-class workers with good benefits.

Health analysts from across the political spectrum have pressed for changing the tax treatment, arguing in part that the exclusion provides the greatest tax relief to high-salaried workers with generous insurance plans.

But, she wrote,

the issue represents treacherous politics for Obama, given his attacks on Sen. John McCain (R-Ariz.), who advocated a similar approach during the campaign.

"For the first time in American history, he wants to tax your health benefits," Obama said in September. "Apparently, Senator McCain doesn't think it's enough that your health premiums have doubled. He thinks you should have to pay taxes on them, too."

Strongly desiring to declare a health-care victory this year, Obama is now taking a more nuanced approach, aides said. "His style of leadership is to say, let's not get bogged down; let's keep moving forward," said one senior adviser who was in yesterday's meeting. "He's not ruling anybody's ideas out."

Jackie Calmes and Robert Pear wrote in the New York Times last March about his attacks on McCain:

At the time, even some Obama supporters said privately that he might come to regret his position if he won the election; in effect, they said, he was potentially giving up an important option to help finance his ambitious health care agenda to reduce medical costs and to expand coverage to the 46 million uninsured Americans.

Meanwhile, Congress is taking a historic leap into action. Noam N. Levey writes in the Los Angeles Times:

Spurred on by President Obama and an array of businesses, medical providers and consumers clamoring for change, congressional Democrats have begun to lay out specific plans for overhauling the nation's healthcare system -- proposing changes that would affect almost every American, old or young, sick or well, rich, poor or middle-class.

Despite a looming brawl over key details, the Democratic majority is expected to pass a bill that will make ordinary Americans the ultimate stakeholders who must live with the system, adjust to changes and -- one way or another -- absorb the costs....

Though they differ on important details, the Democrats' plans all focus on three broad goals, each of which has contributed to stalemate in the past:

* Improving the quality of care for everyone by encouraging doctors, hospitals and others to adopt the best, most effective courses of treatment....

* Curbing the explosive growth in costs by prodding the medical system to make more cost-effective decisions and to increase efficiency by moving to computerized medical records....

* Making health insurance readily available to the 46 million people who don't have it, as well as more affordable and less burdensome to those who do, and to the employers who still deliver the bulk of medical insurance to workers.

Washington Post blogger Ezra Klein writes:

It's worth taking a step back for a second to consider the weight of the moment. It's been 15 years since Congress last tried, and failed, to reform the American health care system. Fifteen years in which everything has gotten worse. In which health care costs have risen and insurance coverage has contracted. In which individuals have lost their protection and businesses have lost their competitiveness.

It's easy, in the daily jockeying between committees and factions and caucuses, to forget that something pretty big is happening here: Congress is trying to solve, or at least improve, one of the most severe and enduring public policy problems confronting the country. A problem that has resisted the efforts of Franklin Delano Roosevelt, Harry Truman, Lyndon Johnson, Richard Nixon, Jimmy Carter, and Bill Clinton, but is pressing enough that for all its difficulty, it has never dropped from the agenda.

The Washington Post's Shailagh Murray recalls the collapse of "Hillarycare" in the early 1990s and writes:

The great unknown of the health-care debate as it unfolds in the months ahead is whether the current political landscape will prove more hospitable to mandates, cost controls and tax increases -- all measures now on the table that helped doom the Clinton plan.....

Even Republicans concede that Obama enjoys some key advantages the last Democratic president did not.

But Murray sets up what is likely an impossible standard for Obama to meet: "Big, ambitious bills need big, bipartisan margins not only to pass but also to earn credibility with voters," she writes. Then, in the very next sentence she illustrates why that's so unlikely: "Republican lawmakers know that the more GOP votes Obama can secure, the more he will shield Democrats from [an] electoral backlash in 2010."

© 2009 The Washington Post Company