The key agenda item in the budget is health care. That's what will dominate the week's message and Obama's primetime speech. So what will the budget say? Or, as importantly, what won't it say? Health care will be financed. The two big revenue streams that we're hearing about are cutting overpayments to Medicare Advantage plans and taxing large employers who don't provide coverage to their employees. They will bring in some money. But not enough. The White House is offering enough funding to show commitment, but not enough to fully offset the costs of the policy (you could argue that they shouldn't full offset the costs of the policy, but that's different). The administration, as John Cohn says, means to leave the rest of the financing question to Congress. But according to both members of Congress and the administration, that ambiguity obscures a specific solution under examination: The employer tax exclusion. The employer tax exclusion is another way of saying Section 106(A) of the Internal Revenue Code. "Gross income of an employee does not include employer-provided coverage under an accident or health plan." In English: Your employer is taxed on the income you're paid but not on the health coverage you receive. Same goes for you, the employee. Income is taxed. benefits aren't. Individuals do not get the same tax break if they purchase health care for themselves. So buying health care is effectively cheaper for an employer than an individual. As a matter of simple equity, it's a senseless system. Regressive, too. Currently, the exclusion is unlimited: A million dollar health care plan isn't taxable on either the employer of the employee's side. And more generally, people who get health care coverage from their employers -- how many lawyers do you know without health benefits? -- are richer than those who don't. But those who don't -- self-employed truckers, say -- are subsidizing them. So you're left with an expensive piece of bad policy. The employer tax exclusion cost about $134 billion in 2007. That's more than Obama's plan is likely to cost in total. But the employer tax exclusion isn't likely to dissolve completely. It's too much political pain. People like artificially cheap health care. Rather, most suggest it could be capped. The numbers you often hear are $7,500 for individuals and $15,000 for families. That aligns pretty closely with average health coverage costs. Expensive plans, in other words, would be taxed, while the median plan would not. Congress, indeed, has been slowly working its way towards exactly this conclusion. Ron Wyden's Healthy Americans Act replaced the employer tax exclusion with a health care standard deduction that phases out for families with higher incomes: Individuals making more than $125,000 receive no deduction at all. Max Baucus's white paper doesn't get into specifics, but simply states, "Most economists argue there are problems with the current set of tax incentives for heath care...One option for reform is to cap the amount of health care premiums that can be excluded from employee wages for income and payroll tax purposes." So why make Congress take the lead? This is a particularly tricky policy for the Obama administration to propose because they brutalized John McCain for suggesting much the same thing. McCain, they said, was planning to tax employer health care benefits for the first time in history. Hypocrisy? Maybe a bit. But not on the merits. The problem with John McCain's health care plan, as I and others argued at the time, was not that it eliminated the employer tax exemption, but that it put nothing in its place. The McCain plan removed the exemption and offered subsidies for the existing individual market in return. That was worse than nothing. The strategy being discussed between Obama and congressional Democrats caps the exemption and use the money to build a better group market. But it remains a tough idea for the White House propose. So the White House will, in the coming budget, make most of the hard choices on financing. But not all of them. Some money will have to be found by Congress. And sources both inside and outside the administration expect that Congress already knows where much of that money will come from. Related Links: • A Congressional Research Service brief on the employer tax exclusion (pdf). • What was wrong with John McCain's proposal. • Ron Wyden's health plan. (CBO remix) • Max Baucus's White Paper (pdf).
