Health Care Cure Seen in Tax Code

COMMENTARY Health Care Reform

Health Care Cure Seen in Tax Code

May 22nd, 2009 3 min read


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 obvious attraction.

There are understandable concerns. But these have been addressed by supporters.

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 cap.

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 reform.

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 solution.

Stuart Butler is vice president for domestic policy issues for the Heritage Foundation.

First appeared in the Washington Times

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