Tax News

CCH (cch.taxgroup.com) reports:

  In the third of three roundtable discussions on health care reform, the Senate Finance Committee on May 12 turned to the current tax treatment of health care and considered, among other proposals, ways to modify the current unlimited exclusion for employer-provided health care as a way to raise revenue. Committee Chairman Max Baucus, D-Mont., said he also wants to look at tax-preferred health accounts and the itemized deduction for health expenses to make sure that those benefits are structured fairly and efficiently.

  Baucus made clear that elimination of the exclusion was off the table but that there is room for modification. "We are not going to eliminate the exclusion... but the current tax exclusion is not perfect," he said.

  As lawmakers consider the prohibitive costs of reforming health care and making it available to all, many have begun to consider compromises. Some form of the exclusion proposal still remains in play and is backed by Tax Policy Center Director Leonard E. Burman, who said that, although the policy would be undesirable as a stand-alone measure because tens of millions of Americans would likely lose their health insurance, eliminating the exclusion would raise a lot of revenue, an estimated $240 billion in 2010 and over $3.5 trillion over 10 years. "I don't see how you can get a package that's going to fully get there without touching the exclusion," stated Robert Greenstein, executive director of the Center on Budget and Policy Priorities.

  According to Burman, a less draconian measure would be to cap the exclusion and deduction for the self-employed at the 90th percentile. Alternatively, the exclusion could be capped.

  Another option offered by Burman to raise revenue to help finance health care reform includes replacing itemized deductions with a 15-percent tax credit for those who choose not to take the standard deduction. The rationale for the change, as with the Obama administration's proposal to limit the benefit of itemized deductions to 28 percent, is that itemized deductions largely represent subsidy programs, rather than adjustments in the ability to pay tax.

  Edward Kleinbard, chief of staff for the Joint Committee on Taxation, noted that the president's fiscal year 2010 budget proposes limiting the rates at which taxpayers may benefit from itemized deductions. Opponents have argued that such a limitation is inappropriate to the extent that the deductions, such as those for medical expenses, casualty or theft losses, or local taxes, are designed to reflect more accurately a taxpayer's ability to pay. "If this is the case, then no adjustment should be made to the deductions, and any concern about fairness or progressiveness should be addressed through the marginal tax rate structure," said Kleinbard.

  Other options advanced by Burman include an increase in the Social Security payroll tax rate on both employers and employees by 1 percentage point or a value-added tax (VAT).

  Michael F. Jacobson, executive director of the Center for Science in the Public Interest, said the best way to promote health and reduce health-care costs is to levy taxes that would both promote health and generate revenues that could help fund expanded health-care coverage. He suggested imposing a new excise tax on non-diet soft drinks, including both carbonated and noncarbonated beverages. A tax of one cent per 12-ounce can would raise about $1.5 billion per year, and a tax of one cent per ounce would raise about $17 billion per year. The higher rates would reduce consumption and help slow the obesity epidemic, he said. Jacobson also suggested that Congress raise alcohol excise taxes, taxing all products equally on the basis of their alcohol content, and index tax rates for inflation.

White House Response

  White House Press Secretary Robert Gibbs declined to comment on any of the tax-related health care proposals under discussion in the Senate. However, he noted that, during the presidential campaign, President Obama said he was opposed to taxing employer-based health insurance.

  The president wants to preserve the employer-based health care system "but done in a way that envisions significant reform in how we're spending money," Gibbs said at a press briefing on May 12. He stressed that health care costs are rising at an unsustainable rate and that the problem must be addressed by both the public and private sector. He also maintained it is possible to make "sustainable progress in cutting the cost of health care without raising taxes."

  By Jeff Carlson and Paula Cruickshank, CCH News Staff