Will Obama Tax Your Health Benefits?

"The campaign definitely demagogued the issue," said Nichols who served as senior advisor for health policy at the Office and Management and Budget during President Clinton's unsuccessful health care reform efforts of 1993-94.

The McCain campaign claimed Obama distorted his rival's proposal by ignoring that McCain was proposing to partially replace the exemption with a refundable tax credit which would go to all Americans, including those who do not receive insurance from their employers.

Nichols is quick to point out, however, that there were several other problems with McCain's plan which Obama and Democrats on Capitol Hill avoid in their reform proposals.

"The deregulated nature of the insurance market into which the McCain proposal would take the U.S. health system was, from a policy standpoint, the worst part of his plan," said Nichols. "But the Obama campaign chose to focus on the tax part of it, frankly, because it was far easier to explain."

Now that Baucus is putting taxing health-care benefits on the table, the Obama White House is keeping its distance from the concept while being careful not to reject it out of hand.

At a recent forum sponsored by the Kaiser Family Foundation, Nancy-Ann DeParle, Obama's top health-care aide, indicated that Obama opposes eliminating the tax exclusion for employer-provided health-care out of a concern that such a move would unravel the system of employer-based care.

She was careful, however, not to rule out limiting the tax exclusion.

"He has serious concerns about any kind of financing that is built on dealing with that tax exclusion or somehow undermining it," said DeParle, the director of the White House Office of Health Reform. "He is very skeptical of those plans and he has been clear about that."

"That said," she added, "we are working with the congress on how this will be financed and a lot depends on the exact contours of the bill that they come up with."

Limiting the tax exclusion could work in a variety of ways. In a blueprint for health legislation released in November, Baucus wrote that the U.S. could tax benefits above some value, tax only wealthy employees or both.

Taxing only wealthy employees is the solution preferred by liberal groups like Health Care for America Now whose director, Richard Kirsch, says such an approach would more neatly fit with Obama's overall tax framework.

But limiting the tax increase to those who make more than $250,000 per year would not raise nearly as much revenue as taxing anyone with a "gold-plated" health-care plan.

"To the degree that you close the door" on taxing employer-provided health benefits, said Nichols, "you force yourself to dig deeper into" other tax increases or Medicare savings. "I think it's going to come down to a calculation about whether it is worth taking the chortles from the Republicans because they have to as opposed to how hard they have to hit the hospitals if they don't."

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