Obama and the Health Tax Exclusion: Are His Lips Moving?

President Obama appears to be ever-so-slowly backing away from his hard-edged campaign opposition to capping the $246 billion employer-sponsored insurance tax exclusion as a way to help pay for health reform.

It’s the typical Washington dance. First, on June 2, the President met privately with two dozen Senate Democrats to talk about health reform. Senate Finance Committee Chairman Max Baucus (D-MT), who favors curbing the exclusion, told reporters after the meeting that the President was now willing to consider some limits on the tax subsidy. Another Democrat, Chris Dodd of Connecticut, heard it differently, telling the Wall Street Journal that Obama was not budging. Finally, a White House spokesman ended the day with this: "The president made it clear during the campaign that he has serious concerns about taxing health-care benefits.”

Yes, he did. But the White House was not saying Baucus misheard.

Washington old-timers have seen this before. Remember George H.W. Bush’s campaign pledge: “Read my lips, no new taxes.” Obama’s election promise may be just as short-lived, though without the same dire political consequences.  

All of this will result in a few weeks of serious inside-the-Beltway reading of entrails. But my own sense is that Obama will inevitably accept a curb on the exclusion. He’ll do so reluctantly, at least in public, to placate unions and others who insist the exclusion is untouchable. But, as we’ve seen, Obama, unlike the most recent President Bush, is not a my-way-or-the-highway kind of guy. His governing style appears to tilt much more in the direction of my way…or your way.

Even before Obama’s trip the Hill, OMB Director Peter Orszag drew his own line in the sand. In his blog (does Peter never sleep?), Orszag wrote, “We are insisting that health reform be deficit neutral even over the next five to 10 years, through scoreable offsets such as savings within Medicare and Medicaid and (as necessary) additional revenue.” 

This means one of two things: Either health reform will be slowly phased-in over the next decade or more—a step that will allow lawmakers to finesse the offsetting tax hikes as well. Or Obama will have to swallow an exclusion cap. Once Congress is through, the kind of Medicare and Medicaid savings Orszag is thinking about will not add up to a lot of money—at least not in the context of a $1.5 trillion reform plan. And there just is no other politically-acceptable place to go to raise the kind of tax revenue the President will need.

Health reform is too important to the President for him to allow it to sink on the fine points of financing. As long as Congress is prepared to take the heat for this, my sense is that Obama will go along. Now, all the policymakers have to do is figure out how to design a cap. TaxVox will have more to say about that in the coming days.