NYT Op-Ed: Should Health Benefits be Taxed? – One Economist’s Perspective
Uwe Reinhardt, an economics professor at Princeton, discussed in Friday’s New York Times the idea of taxing part, or all, of the health insurance premiums paid by employers on behalf of their employees that is currently floating around Congress.
Under current law, employers can treat the contributions they make to the premiums for their employees’ health insurance as a tax-deductible business expense. On the other hand, employees do not pay income taxes or payroll taxes on this contribution, though it clearly is part of the employees’ total compensation. In 2007, this tax preference reduced federal tax revenues by an estimated $250 billion or so. Estimates for 2010 have been as high as $297 billion.
Reinhardt says that most economists – including himself – and many other health policy experts have long looked askance at this tax preference. According to Reinhardt, this form of public subsidy has two effects that economists find problematic. First, the price reduction drives up the demand for the subsidized commodity — for example, for generous health insurance packages. It becomes one of several cost drivers in health care. Second, and much more problematic, in dollar terms the price reduction is larger for high-income employees in high marginal tax brackets than for lower-income workers. In other words, the benefits of such “tax expenditures” accrue disproportionately to higher-income groups. Very low-wage workers hardly benefit at all from the tax exclusion, while their bosses benefit handsomely.
Why do lawmakers favor this distributional effect? So far, health policy wonks have been the sole opponents of this tax preference in health care. They have been howling into the wind because that subsidy has been staunchly defended by a powerful coalition of unions and employers, along with politicians and policy experts left of center on the ideological spectrum. Employers favor the tax preference, because employer-sponsored health insurance is a major come-on in the labor market. The tax subsidy to these programs gives employers an added advantage, in addition to the economies of scale they already have in the assembly of information on the market for health insurance. Unions, along with left-of-center politicians and policy experts, have defended the tax preference in spite of its regressive nature, in the belief that its abolition would erode employer-sponsored health insurance and in that way eliminate the only larger risk pools that exist outside government-sponsored insurance.
Given the formidable coalition against limiting or eliminating this particular tax preference, Reinhardt asks why some politicians now dare to raise the issue at least for public debate. Reinhardt asserts that the answer is sheer desperation over financing the promised march toward universal health insurance. The 10-year outlay for providing universal coverage has been estimated to fall between $1.2 trillion and $1.8 trillion. That range depends on (a) the number of American families requiring public subsidies toward the premiums for their health insurance, (b) the generosity of the minimum benefit package to be guaranteed all Americans and (c) the generosity of the public subsidies toward the purchase of health insurance.
In his February budget message, President Obama spoke of a $634 billion “down payment” toward universal coverage, as if that sum were securely stashed in a lockbox. On closer inspection, Reinhardt describes this down payment as more in the nature of 634 sparrows in a tree that the president tries to catch. About half of these sparrows are expected from “greater efficiency” in the delivery of health care. But because one person’s “greater efficiency” is another person’s “income loss” (since lower spending on health care translates to less in earnings for health care providers), these sparrows are not easily caught. The remaining sparrows represent the higher tax revenues the administration proposes to collect by limiting the savings taxpayers can reap on itemized deductions, including charitable donations. However, this idea will not sit well with museum directors, religious leaders, university presidents, and heads of other nonprofit groups. Reinhardt argues that even if all 634 sparrows could be caught and put into a lockbox, an additional $600 billion to $1 trillion might be needed over the next 10 years for truly universal coverage. This prospect makes the tax preference granted employer-sponsored insurance now an inviting target for a raid by Congress.
No one is proposing to eliminate this tax preference altogether, much as some policy wonks might favor it. Instead, the idea is to recapture at least some of tax loss — say, $80 billion to $100 billion or so a year — to help finance health care for the now-uninsured. Reinhardt asserts that this could be done in one of two ways. First, Congress could stipulate that the tax exclusion be capped at a certain level for all employees. If that cap were, say, $10,000 for family coverage, and an employer contributed $12,000 toward the premium for family coverage, then $2,000 would be added to the employee’s taxable income on the W-2 form. Reinhardt notes that a major problem with this approach is that per-capita health spending in this country varies by more than a factor of 2 so the cap would probably have to be adjusted for regional per-capita health care costs.
Reinhardt offers an alternative: to not tax employer-provided health benefits for employees below a certain income level — e.g., $75,000 — but to add an ever larger fraction of the employer’s contribution to the employee’s taxable income, as income rises. For employees earning more than, say, $200,000, the entire employer contribution to health insurance might be added to the employee’s taxable income.
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