Tax Analysts Blog

Congress Gets (Sorta) Serious About Health Care Taxes

Posted on May 22, 2009

Apparently, Congress is warming to the idea of taxing employer-provided health benefits. Thank goodness for small miracles: it was starting to look like lawmakers would never find a tax they could swallow. (Except maybe the soda tax. Ba dum dum.)

Still, I'm dubious about the prospects for this idea, which seriously rankles union groups. But at least Congress is getting serious about unpleasant realities."Everyone hates it," one Ways and Means Committee member told the Washington Post. "But where else do you go?"

Curbing the tax break for employer-provided health benefits is a good idea, as my colleague Marty Sullivan recently pointed out. And it enjoys considerable support among liberals -- except those who run for office. As Ezra Klein explains in the latest installment of his "Health Reform for Beginners" series:

    This concerns some unions, who have bargained for better-than-average benefits and don't want to see them taxed. It'll worry a lot of workers. It'll give opponents of health care reform the same attack line Obama used so effectively during the campaign. It'll give Obama's political people heartburn. But if you want to pass health care reform, it probably has to be done.
Klein offers a nicely abbreviated history of the health benefit exclusion. The exclusion is a great example of path-dependency in policy formulation. Take a few draconian price regulations in World War II, mix with some powerful unions negotiating for better compensation, and voilà: decades of dysfunctional tax and health policy.

Actually, there are plenty of other examples of path dependency, including many in the tax system. Like America's peculiar aversion to a value added tax. Which brings us back to the more general question of financing healthcare reform. Why can't Congress muster the courage to create a real, permanent, and sustainable funding source for universal healthcare? Like a VAT?

There are plenty of answers, most of which also trace their roots to World War II. In a nutshell, Franklin Roosevelt poisoned the well against any sort of broad federal consumption tax. Which was probably the right move at the time. But it's made life difficult for liberals ever since, limiting the size of the American welfare state. If Democrats want to create a big new entitlement -- and keep it, when electoral tides inevitably turn -- then they need to face down this fiscal legacy.

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