Will Obama Tax Your Health Benefits?

WASHINGTON, May 12, 2009— -- 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.

"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."