Wednesday, April 22, 2009

Lawmakers Debate Tax on Health Benefits

From the Wall Street

As lawmakers wrestle with how to pay for a proposed health-care system overhaul, an emerging flashpoint of debate is whether higher-income employees should face steeper taxes on health benefits than those with more-modest income.

Senate Finance Committee staff this month began talks in earnest aimed at reaching bipartisan agreement on a broad health-care rewrite. The greatest chance for bipartisan accord, for now, is in the hands of two Senate players -- Finance Chairman Max Baucus (D-Mont.) and his Republican counterpart, Sen. Charles Grassley of Iowa.

Sen. Baucus favors taxing some employer-provided health benefits. In an informal "white paper" released earlier this year, Sen. Baucus said this could be done without disrupting the employer-based health-benefits system, where nearly three-fifths of Americans get health insurance.

But congressional Democrats and Republicans may have difficulty finding common ground on how to limit the tax benefits that currently favor employer-based health plans. One way to do that is to impose a dollar cap on the cost of health benefits that may be excluded from taxable income.

An alternative, suggested by Sen. Baucus, is to deny the exclusion to individuals above a certain income threshold. Republicans are resisting that approach, according to aides with knowledge of staff discussions.

A third possibility would be to combine the two approaches, by allowing tax-free health benefits to the lowest earners but taxing health benefits above a certain income threshold on a sliding scale that increases as income rises.

For instance, single workers with income under $62,500 could have all their employer-based health benefits excluded from income tax, while benefits eligible for exclusion could be capped for those with income between $62,500 and $125,000. Above $125,000 all benefits may be taxed.

Also under consideration is a plan that would allow for adjustments in the tax treatment of benefits depending on where the employee lived. There is significant variation in health-care costs among states.

Labor unions are warning lawmakers against capping the exclusion for lower- and middle-income workers. They argue that to do so would single out workers at firms with large numbers of older workers and retirees, and small firms that may pay more for health-care because they have less ability to spread risk.

"If you had to choose, an income threshold would be better," said JoAnn Volk, a health-care lobbyist at the AFL-CIO. "But anything that might undermine the place where most workers get coverage is a concern."

Blog Archive