May 22, 2009
By Stuart M. Butler, Ph.D.
Call it Brewster's tax code. When it comes to health coverage,
our tax system is a variation on "Brewster's Millions."
In the Richard Pryor movie, Brewster stood to inherit $300
million if he could spend $30 million in 30 days ... and have
absolutely nothing to show for it. Today, our tax system is
designed to spend $200 billion a year to help working people afford
health insurance ... but in a way so wasteful, we leave an
incredibly large number of families still uninsured.
Brewster's tax code, you see, directs most of the coverage
subsidy to people with good incomes who already have generous
coverage. Little or no help goes to those who are just scraping by
and can't afford even a basic plan. It also limits the subsidy only
to plans arranged by employers. Families without employer-sponsored
coverage get zip. It's a great way to use up the dough and leave
millions without coverage.
This crazy system has been criticized from the right and left
for years. But now, because of the need to pay for health reform,
an old idea is being dusted off to fix it.
The idea has two parts.
First, limit the amount of employer-based health insurance
that's tax free. Just as there is a limit on tax-free contributions
to 401(k) plans. Second, use the revenue generated by the cap to
assist those working families who can't afford coverage today. Most
proposals would do that in the form of a tax credit, which gives
lower-paid families more help than a deduction would.
Some people might still choose to take a large chunk of their
compensation in the form of health insurance and pay tax on the
amount of insurance above the cap. That would be no different than
the tax they pay on cash compensation.
But a cap would make most people think hard about the level of
benefits they actually need, and that would help reduce health
costs. That's because they would negotiate with their employer to
get more of their compensation in taxable cash and keep their
health insurance at or near the cap. They'd be deciding to forgo
unlimited tax-free colonoscopies or no-questions-asked X-rays and
MRIs for every bump and bruise, and instead get more money in their
paycheck for each month's rent or car payment.
The cap idea has enjoyed bipartisan support among health
economists and think tanks for many years. True, candidate Barack
Obama denounced one version proposed by John McCain. But Mr. McCain
wanted to completely abolish the tax exclusion. Yet several of Mr.
Obama's top advisers have long supported the more moderate approach
that would only limit the exclusion. And Senate Finance Committee
Chairman Max Baucus, Montana Democrat and a key Senate health care
mover-and-shaker, has carefully reopened the door to the idea.
Little wonder. Congress is desperate to find ways to pay for
expanded coverage. Discouraging overspending on health while
generating revenue to help uninsured people afford coverage has an
There are understandable concerns. But these have been addressed
Some people worry that a cap would be unfair to older workers
and workers in small companies. These workers and people in
high-cost areas of the country often can pay stiff premiums for
plain-vanilla health insurance. But Urban Institute scholar Stan
Dorn explains in an upcoming study how, by using the "actuarial
value" of a plan, the Internal Revenue Service could cap tax
subsidies based on the generosity of covered benefits. This would
address the concern by eliminating the need for a fixed-dollar
Others worry that the approach would unfairly tax some
lower-paid people on the coverage they need owing to their medical
condition. That can be fixed, say supporters, by applying the tax
cap only to families above a certain income.
Meanwhile, conservatives bridle at the thought that some people
might pay higher taxes to finance government spending on people who
don't pay taxes. That would be tax-and-spend, they say, not tax
That's addressed by channeling tax revenue from a cap only to
tax relief for families actually paying federal income tax. Tax
reform, not a general tax increase. While working families who pay
no income tax also need help to buy insurance, that could be paid
for with savings in other federal programs - and there is plenty of
fat to trim.
Congress is trying to find ways to help uninsured people pay for
coverage. There are many bad ideas on the table to do so, like
using energy taxes that would hide the cost in higher prices. But
openly reforming the inefficient and unfair tax treatment of health
itself, in ways that would also help slow health costs for all of
us, is a bipartisan idea that can and should be part of the
Butler is vice president for domestic policy issues
for the Heritage Foundation.
First appeared in the Washington Times
Call it Brewster's tax code. When it comes to health coverage, our tax system is a variation on "Brewster's Millions."
Stuart M. Butler, Ph.D.
Distinguished Fellow and Director, Center for Policy Innovation
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