Debate over taxing health benefits picks up

"As the debate on how to fix health care picks up pace, so does discussion about one of the most lucrative ways to pay for it:" taxing employer-provided health benefits, CNN reports. The "tax-free arrangement" in which an employer's contribution to employee health benefit "is treated as tax-free to the employee in terms of income tax and payroll tax," was "born during the days of wage control in 1943."

According to Paul Fronstin, director of the health research program at the Employee Benefit Research Institute, employers were not allowed to "attract workers on the basis of better pay," so instead they offered the benefits "as a way to compete for the best talent." Over the past 66 years, employees have come to expect it. But "tax and health experts say it's inequitable. High-income workers and those with the most expensive health insurance plans enjoy the biggest break as a result of the tax exclusion."

Depending on how the tax exclusion is capped, it could "generate anywhere from $41 billion over 10 years to more than $1 trillion," according to the Tax Policy Center. But a cap "could mean some people will pay tax for reasons that seem unfair," such as living in a more expensive area, working for a small business that does not benefit from the bargaining power of a large participant pool or for working in a business with an older, more expensive pool of workers (Sahadi, 6/4).

Meanwhile, the idea of a cap on employer-provided health benefits is gaining traction on Capitol Hill. Ways and Means Chairman Charles B. Rangel, D-NY, has opposed the tax cap, but CQ reports that Democrats on the committee "hold a thin line of resistance." "Many committee Democrats" say they "want to work out how to expand health coverage and see how much money they can raise through promoting efficiency in the health care system before discussing the revenue side of the bill." That may include designing a public option to compete with private companies first. Senate Finance Committee Chairman Max Baucus, D-Mont., "said Thursday it would be 'difficult' to move a health care bill that does not alter the tax exclusion. 'It's got to be done in a very sensitive way, to make sure the limits are high enough,' he said, adding, 'I think some version is a real possibility, hopefully an appropriate version'" (Rubin, 6/4).

Changing the tax law, however, "would be politically challenging," particularly with "unions with generous health care plans." President Obama "spent his campaign last year shredding opponent John McCain 's proposal to repeal the exclusion and replace it with a tax credit for purchasing health care."

Time adds that the current tax system "is regressive, with three-quarters of the tax break going to those who are in the top half of the income-distribution scale" (Tumulty, 6/5).