SHOULD HEALTH BENEFITS BE TAXED

At a time when Congress is gearing up for a major tax reform debate, a group of mostly conservative economists is pushing an idea that could fundamentally alter the employer-based health care system.

Currently, contributions that employers make to group health insurance policies for their employees are excluded from taxation. The contributions aren't counted as part of an employee's income, so employees don't have to pay payroll taxes or income taxes on the contribution.

Some free-market economists complain that the tax break fuels excessive spending on health care. They argue that employees--including high-income employees--get an unlimited tax break to buy Cadillac health insurance plans and thus have little incentive to restrain their use of the health care system. Critics of the exclusion also note that many lower-income people get no help at all from the tax code because they are unemployed or their employer doesn't offer a health care benefit. About 45 million Americans today have no health insurance.

As a first step toward addressing the issue, the economists suggest that a cap be placed on the amount an employer can contribute to an employee's health insurance plan before the contribution is counted as income--and thus subject to taxation.

House Ways and Means Committee Chairman Bill Thomas, R-Calif., has criticized the tax incentives in employer-based health insurance, and those who are pushing for change say they are hopeful that Thomas will use any tax bill this year to alter those incentives.

"Join me briefly to go back to that period in history when somebody decided, instead of giving somebody a dollar increase in wages, we should create collusion between the government and the employer and give them quote-unquote health care or fringe benefits," Thomas said in a February 12, 2004, speech at a National Press Club briefing sponsored by the National Center for Policy Analysis, a conservative group based in Dallas. "That little separation between wages and fringe benefits has laid the groundwork, fundamentally and virtually completely, for the [health care] problems that we face today."

The system doesn't work, he said, because "not everybody's employed." Worse yet, he added, because employer-based insurance is paid by a third party, employees have lost touch with the true cost of health care and have unwittingly driven it up. "No one knew the cost of medical care, and frankly, no one cared," he said. "The only question asked was, 'Does my insurance cover it?'"

Wiping out the tax break altogether could effectively increase employees' health care costs at a time when most health care discussions in Washington begin and end with the subject of growing costs. Grace-Marie Turner, president of the Galen Institute, a group that promotes free-market tax and health policy issues, argues that the health care market would eventually become more efficient if Congress capped the exclusion.

Health care spending for those with private health insurance increased by 8.2 percent in 2004. That's about the same as the growth in 2003 and almost four times the growth in wages, according to a Center for Studying Health System Change report published this week in the journal Health Affairs.

More than 160 million Americans get their health insurance through an employer, according to Turner, a strong opponent of the tax exclusion. She says that the exclusion costs the Treasury more than $130 billion a year, making it "much more valuable than even the mortgage interest deduction. Yet this subsidy leaves millions of people behind, especially those at the lower end of the income scale."

Turner is seeking the signatures of economists and health care leaders on a petition to urge members of Congress to limit the exclusion. To date, Turner has nearly 60 signatures from free-market advocates, including Robert Helms, director of health policy studies at the American Enterprise Institute, and John Berthoud, president of the National Taxpayers Union.

While Turner said that her preference is for Congress to completely eliminate the exclusion, she noted that the petition was written with political realities in mind. "Congress could begin by capping the amount of income that employees can shelter from taxes, allowing only a fixed-dollar amount of health insurance to be exempt."

Turner suggests that the savings could be used to offer uninsured people a tax credit or some other subsidy to purchase insurance coverage, although some economists say it would make sense to use the savings to offer people an across-the-board tax cut. All sides seem to agree that the savings would be minimal unless the exclusion is eliminated altogether.

The idea now, Turner says, is to "cap it at some high amount that hits almost nobody, so that people can start to learn and get the point about how much of their compensation is going to health care, so they can begin having discussions with employers about how to stay under the cap. [The government] wouldn't collect much revenue from it. It's a tool to get people to understand the full cost of their health insurance."

But others fear that cracking the door would lead to an eventual elimination of the exclusion. Marina Weiss, a senior vice president at the March of Dimes, said she's not surprised the proposal is drawing attention, because of the recent groundswell of conservative interest in consumer-based health care. However, she said, "it's a nuclear option. It's so stunning a proposal that it's usually talked about behind closed doors or in academic settings."