Bush Proposes Tax Breaks for Health Insurance
President Bush in his weekly radio address on Saturday said that he will propose a plan that would offer tax deductions to most individuals who purchase health insurance and levy an income tax on the highest-priced employer-sponsored health insurance plans to offset the tax breaks, the Wall Street Journal reports.
Under the proposal, employer-sponsored health insurance for the first time would be considered taxable income in some cases (McKinnon/Harwood, Wall Street Journal, 1/22). Currently, employees are not taxed on the value of their employer-sponsored health insurance policies (Fletcher, Washington Post, 1/21).
The Department of the Treasury estimates that the plan would increase the number of U.S. residents with health insurance by five million, and administration officials said the number could be higher (Wall Street Journal, 1/21).
The Bush proposal would allow a federal tax deduction of $7,500 for individuals and $15,000 for families who purchase health insurance on their own or through an employer. Individuals and families with employer-sponsored health insurance plans worth more than the allowable deduction would pay income taxes on the difference (Jackson, USA Today, 1/22).
The full deduction would be available to all individuals and families who purchase health insurance, regardless of the value of their policies or whether they itemize deductions on their tax returns. For U.S. residents who receive employer-based health insurance, the deduction would be offset by the cost of their coverage (Washington Post, 1/21).
The amount of the allowable deduction would increase in future years based on some measure of overall inflation but would not necessarily be indexed with changes in medical or health care costs, the New York Times reports (Stolberg/Pear, New York Times, 1/21). The plan would pose no cost to the government over 10 years, according to an individual familiar with the proposal (Wall Street Journal, 1/21).
Bush is expected to provide more details on the plan in his State of the Union speech on Tuesday (New York Times, 1/21). According to the administration, the plan would decrease tax liabilities for about 80% of people with employer-sponsored health insurance (Washington Post, 1/21).
In his radio address, Bush said, "Today, the tax code unfairly penalizes people who do not get health insurance through their job," adding, "It unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many American cannot afford the coverage they need" (Alonso-Zaldivar, Los Angeles Times, 1/21). He continued, "We must address these rising costs, so that more Americans can afford basic health insurance. And we need to do it without creating a new federal entitlement program or raising taxes" (Riechmann, AP/Arizona Daily Star, 1/21).
Bush said, "The current tax code encourages home ownership by allowing you to deduct the interest on your mortgage from your taxes," adding, "We can reform the tax code so that it provides a similar incentive for you to buy health insurance" (Dinan, Washington Times, 1/21). Bush also said his State of the Union speech would include information on "a new effort ... to help governors reduce the number of people in their states without private health insurance," although he did not provide details (Herman, Cox/St. Paul Pioneer Press, 1/21).
White House spokesperson Dana Perino said Bush's speech "will outline issues where he believes we can find common ground with the new Congress" (Washington Times, 1/21).
Experts said the idea of taxing higher-cost health insurance policies to subsidize health insurance for the uninsured "has been around at least two decades," the Post reports (Washington Post, 1/21).
Former CMS Administrator Mark McClellan said, "In the 21st century, we have more people working in self-employment, so there are more and more people who don't benefit from the tax exclusion" (Los Angeles Times, 1/21). He also observed that "the conventional wisdom is that there would be too much political opposition to propose" taxes on health insurance, adding that the idea is "quite controversial" (New York Times, 1/21).
According to the Post, "[N]ow may be an interesting moment to resurrect the idea because the new Democratic Congress has vowed not to initiate any new programs that cannot pay for themselves." In addition, "the idea of imposing a tax on those with generous coverage to help those without it has a progressive cast that could appeal to Democrats," the Post reports (Washington Post, 1/21).
Grace-Marie Turner, president of the Galen Institute, said, "This really changes the conversation," adding, "People understand tax deductions."
However, Ron Pollack, executive director of Families USA, said that the plan is not dead on arrival to Congress, but "it's going to be wounded on arrival" (Wall Street Journal, 1/21).
Senate Health, Education, Labor and Pensions Committee Chair Edward Kennedy (D-Mass.) said, "It is good that the president is finally talking about health care. I question, however, why the president thinks the way to solve this problem is through the tax code" (Washington Post, 1/21).
House Ways and Means Committee Chair Charles Rangel (D-N.Y.) said, "This is a dangerous policy that ultimately shifts cost and risk from employers to employees and could result in a higher number of uninsured" (Washington Times, 1/21).
Sen. Ron Wyden (D-Ore.) said, "The market is broken," adding, "Private insurance companies cherry-pick. They're trying to take just healthy people and send fragile people over to the government programs more fragile than they are, and I'm not sure what this does to fix the broken market."
Neil Trautwein, a vice president of the National Retail Federation, said, "This is a classic case of robbing Peter to help Paul pay for coverage. I do not think the president will find many backers in the employer community for this proposal." He added that "we should not start by endangering coverage for people who already have it" (New York Times, 1/21).
Katie Mahoney, a health care policy analyst at the U.S. Chamber of Commerce, said, "Our concern ... it that is would undermine the current system and become a disincentive for employers providing good, rich benefits for their employees" (Los Angeles Times, 1/21).
"Going without health insurance isn't like deciding to rent an apartment instead of buying a house," New York Times columnist Paul Krugman writes in an opinion piece on the Bush proposal. A lack of health insurance is "a terrifying experience, which most people endure only if they have no alternative," Krugman writes, adding, "The uninsured don't need an 'incentive' to buy insurance; they need something that makes getting insurance possible."
According to Krugman, "Most people without health insurance have low incomes and just can't afford the premiums," and "making premiums tax-deductible is almost worthless to workers whose income puts them in a low tax bracket." He writes, "No economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul's premiums," adding, "Will all those who think they have 'gold-plated' health coverage please raise their hands?" (Krugman, New York Times, 1/22).