John McCain's Best Idea

During the presidential campaign, I thought Barack Obama made only one big policy mistake. He criticized John McCain for proposing to tax all employer-provided health benefits. McCain's overall plan was regressive -- he would have turned the savings into tax credits for purchasing health care -- but he was right about where the revenues should come from. I worried that Obama would come to regret the position he took.

Half a year later, it appears that the president will need to tax employer- provided health benefits in order to finance universal health care. Many in Congress and in the White House are convinced it's the only good option. Sen. Ron Wyden's health proposal would make health benefits taxable. Sen. Max Baucus, whose Finance Committee has jurisdiction over taxes and health policy, has publicly stated his support for taxing employer health benefits. Peter Orszag, the president's budget director, has told Congress the option should "remain on the table."

The White House is in a revenue bind. The president had intended to raise money for health care by limiting the income-tax deductions that wealthy taxpayers can claim. This would have generated some $318 billion over 10 years, about half of Obama's proposed "health-care reserve fund." But the proposal ran into a buzz saw of opposition from congressional Democrats. Not only did Baucus balk but so did Charles Rangel, chair of the House Ways and Means Committee. Obama's latest gambit is to close corporate-tax loopholes, especially those related to foreign tax havens. But even if he's successful -- and such loopholes are notoriously difficult to close -- this would raise only about $200 billion over 10 years, still leaving a huge gap.

With deficit vultures already circling, Obama has to come up with a far more reliable way to fund health care. That's where employee health benefits come in. According to the Congressional Budget Office, taxing them would yield a whopping $246 billion every year. Employer-provided health insurance is the biggest tax break in the whole federal income-tax system.

It is also, in effect, the government-backed health-insurance system we now have. Employer-provided health insurance covers three-fifths of the American population under 65. Seventy percent of the 253 million Americans with health insurance receive at least some of it through their employers.

Which is exactly the problem. Most middle-class American families rely on it and won't want to give it up even if a new universal system becomes available. Organized labor rightly considers these benefits among the union movement's proudest achievements.

But, face it, it's become a crazy system. You're not eligible for these benefits when you and your family are likely to need them most -- when you lose your job and your income plummets. And these days, as we're witnessing, no job is safe. The system also distorts the labor market. It prevents lots of people from changing jobs for fear they'll lose their health insurance or won't get the benefits they do now. And it invites employers to game the system by seeking young, healthy employees who pose low risks of ill health and will therefore keep insurance costs low, while rejecting older ones who are likely to have more costly health needs. The system also encourages employers to try to push married employees onto their spouse's health-insurance plan so that the spouse's employer bears the cost.

It's also an upside-down system. The biggest share of the $246 billion goes to upper-income people. The lower your pay, the less coverage you're likely to have. Workers in the lowest-paying jobs don't generally get any health insurance from their employers. Few people collecting $12 an hour at fast-food restaurants or big-box retailers see any part of the $246 billion. The higher your pay, the more health coverage you receive, and the bigger chunk of the $246 billion you get. Top executives and their families get gold-plated plans guaranteeing top-notch medical attention for just about every risk imaginable, along with extra coverage in retirement.

The good news is that a program providing universal health care doesn't need the full $246 billion a year generated if every employee now receiving tax-free health benefits had to start paying taxes on them. Obama's health-care reserve fund needs around $650 billion over 10 years. So a sensible and politically feasible alternative is to limit tax-free employer-provided health benefits to workers whose incomes are under, say, $100,000 a year and subject those with higher incomes to progressively higher taxes on them.

It's still not the position Obama took in the campaign. But circumstances change.

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