Tax News

CCH (cch.taxgroup.com) reports:

President Bush in his State of the Union address to a new Democrat majority in Congress declared that a divided government can work through its differences and find common ground on issues that are important to the nation. "Our citizens don't much care which side of the aisle we sit on --as long as we are willing to cross that aisle when there is work to be done," the president asserted in the January 23 address.
The president limited his domestic policy remarks to issues that he believes can garner bipartisan support in Congress. He called for measures to balance the federal budget by 2012 and urged Congress to work with him on entitlement reform. The president outlined proposals to increase the number of insured individuals and families and to lessen dependence on foreign energy sources.
The president proposed a health care standard deduction of $7,500 for individuals and $15,000 for families who purchase private health insurance (TAXDAY, 2007/01/23, W.1). At the same time, Bush's proposal would tax those covered by excessively generous health plans on that portion of the cost that exceeds these thresholds.
The plan is designed to level the playing field for those who purchase their own health insurance and those whose coverage is provided by their employers. According to the president, "more than 100 million men, women, and children who are now covered by employer-provided insurance will benefit from lower tax bills."
The proposed changes would simplify the tax code, noted White House Deputy Chief of Staff for Policy Joel Kaplan. "People understand a standard deduction. When everybody gets the same standard deduction, whatever the source of their insurance and whatever the cost, that ultimately is a more simple tax system," Kaplan said.
White House officials anticipate that the number of health savings accounts (HSAs) will grow if the president's proposal is enacted since it is biased toward the purchase of lower premium, high-deductible health insurance and HSAs are paired with these types of plans. The plan also is likely to lead to an acceleration in the trend of employers to drop health care coverage for employees, but more workers would be able to buy insurance in the individual market since the president's plan would provide "a substantial tax benefit," Kaplan observed.
Reaction from Congress
Senate. Senate Finance Committee (SFC) ranking member Charles E. Grassley, R-Iowa said that Bush has correctly identified a flaw in health care tax policy. Citing estimates from the Joint Committee on Taxation that over the next decade Americans will receive more than $1 trillion in tax benefits for health care under current tax law, Grassley declared: "We need to make sure those benefits are being directed wisely, get the most bang for the taxpayer's buck, and help to meet the needs of the millions of Americans without health insurance."
The senior lawmaker said that the president's proposal could help level the playing field by extending the tax incentives for purchasing health coverage to the self-employed and those who purchase health coverage on their own. "I'll study the details of this plan and work with Senator Baucus in the Finance Committee to work to address these issues and expand health insurance coverage," said Grassley.
The SFC Chairman Max Baucus, D-Mont., agreed, saying the president was right to recognize that Congress has to start reforming health care now. "To get traction, his proposals need to meet two tests: getting new health coverage to people who have none, and better coverage to those who don't have enough," said Baucus.
House. House Majority Leader Steny Hoyer, D-Md., said Bush's first move to demonstrate fiscal responsibility should be to present an honest, balanced budget to Congress in February. Hoyer called on Democrats and Republicans to come together to work to lower the federal budget deficit.
Rep. Phil Hare, D-Ill, rejected the president's health care proposals. "Unfortunately, the president's new health care proposal would raise taxes on those middle-class workers fortunate enough to have good plans while doing little to reduce the number of uninsured," Hare said.
House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., said Bush should realize that the domestic problems cited in his speech require bipartisan solutions. "Whether we're talking about expanding health care for the uninsured, ensuring Social Security for generations to come, or promoting fair tax policy, we're not talking about Democratic or Republican problems," Rangel said. He called on Bush to reach across the aisle to find solutions.
House Ways and Means Committee ranking member Jim McCrery, R-La., gave a thumbs up to the president's health care ideas, which he said would level the playing field between employer-sponsored insurance and individual insurance. "I think the president's proposal to extend tax incentives for health insurance to people who work for small businesses or are self-employed is a bold and creative approach to a complex problem," McCrery said.
The opposite reaction came from Rep. Fortney Pete Stark, D-Calif., who chairs the Ways and Means Subcommittee on Health. "The president's so-called health care proposal won't help the uninsured, most of whom have limited incomes and are already in low tax brackets," he said. Bush's plan would hurt middle-income Americans, whose employers will shift even more cost and risk to their employees.
Treasury
The president's health care proposal received more scrutiny at an afternoon briefing by two Treasury officials. The administration has not calculated exact figures on how much the proposal would reduce tax revenue in the first five years or how much revenue would be generated in the next five years. The numbers will be included with the president's fiscal year 2008 budget, they explained. The administration also plans to release numbers in the next few days on the average tax cut and increase.
The Treasury Department did release a chart showing that the proposed standard deduction for health insurance would make the tax code more progressive. Taxpayers in the first quintile of income (to $13,309) would have their taxes drop by about 0.3 percent of their income. Those in the second quintile (to $28,506) would get a tax cut of 0.4 percent of their incomes. Those in the third quintile (to $50,447) would pay fewer taxes by about 0.6 percent of their incomes, while those in the fourth quintile (to $87,757) would pay less by 0.1% of their incomes. The quintile earning $87,758 or more would see a tax hike of around 0.1 percent of their incomes.
By Jeff Carlson, Stephen K. Cooper, Paula Cruickshank and Dave Hansen, CCH News Staff
2007 State of the Union Address
State of the Union 2007 State of the Union Policy Initiatives: Overview Fact Sheet
White House Energy Fact Sheet: Twenty In Ten: Strengthening America's Energy Security
White House Health Fact Sheet: Affordable, Accessible, And Flexible Health Coverage
White House Spending Fact Sheet: Reforms To Spend Tax Dollars Wisely
Treasury Department News Release, Administration's Proposal for Affordable, Accessible, and Flexible Health Coverage, TDNR HP-228