The voices of Tax Policy Center's researchers and staff
As Congress and the administration grope their way toward healthcare reform, a major obstacle is financing: how do we pay the $1 trillion cost over the next decade? Many economists and members of Congress favor reducing or eliminating the tax exclusion of premiums paid for employment-based health insurance (ESI). We owe no income or payroll tax on the premiums our employers pay. The exclusion will cut an estimated $240 billion from federal revenues next year and $3.5 trillion over ten years. And it hits state tax collections too.
The problem with dropping the exclusion is that President Obama painted himself into a corner with his campaign promise not to raise taxes on anyone except the rich. Over 95 percent of people who benefit from the exclusion aren’t rich by Obama’s definition. And as recently as last Thursday, the president told a town hall meeting in Ohio, “I oppose the taxing of health care benefits to the people who are already receiving it. So that's not a proposal that I'm supportive of.”
But the day before, Obama wiggled just a bit in a phone conversation with Washington Post editor Fred Hiatt:
For example, you could conceivably set up an index of some sort that makes sure that health care inflation -- or to make sure that the exclusion only accommodates a certain amount of health care inflation -- as opposed to 8 percent or 9 percent, or what have you -- without burdening current plans, but over time assuming -- if we're assuming that health care inflation is going to continue to be a problem, that you could get at the problem in that way.
Hiatt: A kind of cap, but one that doesn't hurt anybody --
Hiatt: -- at the current level?
That’s not a ringing endorsement but does crack the door open just a bit to wean workers off of the exclusion. A recent Urban Institute analysis of the effects of capping the exclusion and constraining the growth of the caps found that setting a cap at the 75th percentile of ESI premiums and limiting its growth to the rate of overall inflation would recoup about 20 percent of the revenue cost of the exclusion over ten years—about $700 billion. And revenue gains would grow as the cap clamps down harder over time. That’s not chump change in anyone’s book.
Just what changes in the exclusion the president would accept isn’t at all clear. But last week’s comments suggest that Obama’s position on tax increases is softening. And, as he and many in Congress have made clear, health reform won’t happen if we don't find a way to pay for it.
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