Tax Analysts Blog

Tax Trick Not Working, Healthcare Deal Unraveling

Posted on Sep 18, 2009

Economists universally endorse limiting the $250 billion of tax benefits provided annually for employer-provided health insurance. The long-awaited plan from Senate Finance Committee Chairman Max Baucus includes a modest limitation of those benefits. But today we are reading in the New York Times ("New Tax in Senate Health Plan Draws Bipartisan Fire") how Senators of both parties are up in arms about the idea. If our "leaders" can't agree to this reasonable proposal that raises revenue critical for supporting expanded coverage, you can kiss healthcare reform good-bye.

Baucus is proposing an excise tax of 35 percent on insurance companies and plan administrators for any health insurance plan that is above the threshold of $8,000 for singles and $21,000 for family plans. The tax would apply only to the amount of the premium in excess of the threshold, and the threshold would be indexed for inflation.

For as long as it has existed, economists have wanted to limit the exclusion on employer provided healthcare because it disproportionately helps the rich and, more importantly, because it helped create the problem wreaking havoc on America's healthcare system and government finances: out-of-control healthcare costs. But the direct method of addressing the problem--capping the exclusion-- would be clearly visible to citizens when they filed their income tax returns. Then Sen. John Kerry proposed the idea of taxing insurance companies instead of the policyholders. Economists know that it all comes out in the wash, that is, in either the case the tax cost will be borne by the consumer. But politically, Kerry's unconventional approach might be more favorable because it looked like a tax on big, bad insurance companies instead of struggling American workers.

Back in July, when the idea for an insurance company excise tax was first floated, we at Tax.com speculated that it might be the gimmick that healthcare reform needed. We normally despise gimmicks, but this was just too cute. It was a clever way for good economics to prevail over bad politics that we couldn't resist. Unfortunately, according to the report in the Times, the trick is not working.

It is easy for Democrats to oppose the tax because it will penalize union members who have negotiated contracts with generous health coverage. It is easy for Republicans to oppose the tax simply because it's a tax. That kind of Cro-Magnon politics falls far short of the enlightened thinking we will need over the next few years to get through not only health care reform, but also financial regulation reform, climate change legislation, as well as the budget cuts and spending increases needed to bring the federal debt to sustainable levels.

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