Will Obama Tax Your Health Benefits?

Photo: Will Obama Tax Health Benefits? President Blasted McCain on This Issue But Experts Say It Could Trim Costs

During last year's campaign, Barack Obama poured millions of dollars into television ads attacking John McCain for wanting to tax employer-provided health care benefits.

But now that Congress is beginning to consider ways to fix the health care system, a concept once pilloried by Obama is being placed on the agenda by a key member of the president's own party.

Under current law, any money spent on employer-provided health plans is excluded entirely from employee's taxable income.

"That tax provision should be on the table, because it currently is, too regressive. It just skews the system," said Sen. Max Baucus, D-Mont., the chair of the Senate Finance Committee. "I do not favor eliminating it. . . But I do think it needs to be trimmed, limited, looked at."

Taxing health benefits will be front and center Tuesday when Baucus convenes a roundtable discussion with health-care experts on "Financing Comprehensive Health Care Reform."

As the Finance Committee begins to grapple with finding ways to pay for the health-care overhaul, which is estimated to cost $1.2 trillion over 10 years, the big question is whether Obama's previous stance on the tax issue will hurt him.

"He did box himself in, yes," said health-care economist Len Nichols of the centrist New America Foundation. "Let's put it this way, I know David Cutler, the Obama health-care adviser, very well. When I saw the first ad, I sent David an e-mail and said, 'Can you stop these ads?' And he said: 'I'm trying.'"

Cutler, is a Harvard economist who worked in the Clinton administration before serving as Obama's top health-care adviser during the campaign. Nichols said Cutler was aware of the pitfalls. "He knew he [Obama] would need the money after the election. He knows what the math is."

The taxing of employer-provided health benefits is a thorny question for any president because it is an issue on which policy and politics collide.

Baucus wants to finance health-care reform by making the U.S. system more efficient, reducing waste, and focusing on prevention. But those savings are not expected to cover the full cost of covering the nation's estimated 50 million uninsured.

That's why Baucus told ABC News that "if we need to look at other revenue options, we will." "Everything is on the table, including the tax treatment of health care plans," said Baucus. Limiting the tax exclusion for health benefits would be a ready source of revenue. The current exclusion costs the federal government $150 billion per year in revenue and more than $200 billion per year if payroll taxes are included in the calculation.

The current tax-free treatment of health benefits has also been blamed by Jason Furman, another Obama adviser, for making the health care system both "unfair and inefficient."

"A government health-insurance program that provides a $1,000 subsidy for a cleaner, $1,500 for an administrative assistant, and $4,000 for an investment banker is plainly unfair," wrote Furman in a 2006 article which appeared in the "Democracy" policy journal.

The current tax exclusion for employer-provided health-care provides greater subsidies to the well-off because they tend to have more generous health-care plans and they pay higher tax rates, experts say.

Although there are several policy reasons which recommend limiting the tax treatment of employer provided health benefits, it's politically vexing for Obama.

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