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CCH® BENEFITS — 12/30/08

Health Care Reform Should Include A Cap On Health Tax Benefits

from Spencer’s Benefits Reports: Congress should cap tax breaks for health care benefits, according to a recent policy recommendation from the Heritage Foundation. Jason Roffenbender, a health policy fellow in the Center for Health Policy Studies at The Heritage Foundation and the author of the report, wrote that such a cap would bring health care in line with other benefits and would slow the rise of health care costs.

The Heritage Foundation report notes initially that “If Congress wanted to establish an efficient, fair, and equitable tax policy for health insurance, it would replace the existing tax exclusion for health insurance benefits with a universal health care tax credit. The change would not affect the employers’ deduction for health insurance, which would remain as it is today. The credit could be used for all types of health insurance, including employment and nonemployment coverage.”

Other groups that have proposed a universal tax credit include the American Enterprise Institute, the Galen Institute, the Progressive Policy Institute, and the Urban Institute.

Tax Cap A First Step

Acknowledging that passage of a universal tax credit is unlikely, The Heritage Foundation report states that “Congress could at least cap the tax breaks for employer-based health insurance.”

The report recommends implementing the following two-step process for capping the health insurance tax breaks:

• Establish a reasonable limit on tax subsidies for employer-sponsored health benefits. The report notes that health benefits obtained through the employer in the current tax system are increasing at a disproportionate and alarming rate. Nearly all other fringe benefits, regardless of size, have well-supported outlines for establishing capped employer-based health care benefits.
• Reallocate the federal income tax revenue as tax credits toward purchasing individual health coverage. The role of the employer could then shift more toward that of a coverage facilitator for employees, providing administrative support and resources as opposed to sponsoring the health coverage entirely.

The Heritage Foundation report states that one existing legislative proposal could accomplish these objectives, the Tax Equity and Affordability Act (S. 3754), sponsored by Sen. Mel Martinez (Fla.). The bill would establish a new system of income-based health care tax credits for individuals and families without employer-based health insurance, as well as cap the existing open-ended employment-based tax exclusion for health benefits. The bill initially would set caps at $11,500 for family coverage and $5,000 for individual coverage, which would establish maximum amounts of contributions that could qualify for tax preferences.

The Heritage Foundation report states that existing “employer-based fringe benefits with capped tax breaks consistently cost the federal government less in lost revenue than do uncapped benefits, and their annual rate of increase is invariably lower than the growing rates of health insurance costs…. A cap onthe tax breaks for employer-based health benefits would help restrain escalating health care costs. It also would facilitate the development of more innovative policies and would promote health plans with an emphasis on greater value for consumers, not only on the size of the benefit package.”

For more information, visit http://www.heritage.org/research/healthcare/healthcarereform/.

Review Of Tax Exclusion

A November 2008 report from the Congressional Research Service (CRS) notes that federal tax exclusion “likely results in people with insurance obtaining more coverage than they otherwise would. Not being explicitly capped or limited, it does little to restrict the generosity of the insurance or annual premium increases. These attributes contribute to what some economists argue is a welfare (or efficiency) loss from excess health insurance for those with coverage and also contribute to rising health care costs and spending. In addition, the income tax exclusion often is criticized since it gives greater tax savings to higher income individuals and families, an outcome that strikes many observers as wasteful and inequitable.”

However, the report also notes that the “welfare loss” might be difficult to gauge considering how consumers react to higher cost-sharing; determining alternative tax benefits to replace the exclusion that would not adversely affect people with high costs could be challenging; and the larger tax savings to higher income people might not be an inequitable subsidy but only a consequence of the proper treatment of losses under a progressive income tax.

The CRS report, The Tax Exclusion for Employer-Provided Health Insurance: Policy Issues Regarding the Repeal Debate, concludes that a tax exclusion repeal “could have unintended consequences. For example, unless exceptions were made, repeal also would terminate the exclusion for employer-paid disability insurance, health care flexible spending accounts, and other benefits some consider useful.”

For more information, visit http://assets.opencrs.com/rpts/RL34767_20081121.pdf.

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