President Obama has been taking some political licks for backtracking on his campaign opposition to taxing employee health benefits.
Good. He so demagogued a somewhat similar proposal by his opponent, Sen. John McCain, that the president should be taking some heat for—at least potentially—flip-flopping.
That said, capping the employee health insurance tax exclusion is one of those public policy issues that deserves a serious debate—and it’s not getting it.
The money employers spend on employee health coverage is excluded from employee income. Not taxing that employer-provided income “costs” the federal government nearly $150 billion a year, according to the Joint Tax Committee (for 2007). And those with the richest insurance packages get the biggest tax subsidy.
Now, the tax code is often used to encourage certain behavior (whether it should is a question for another day). For example, we allow home mortgage interest deductions as a way to encourage people to buy a house. But that deduction is capped at $1 million to limit middle-class taxpayers from subsidizing the mortgage interest on mansions.
Well, there’s also “mansion”—i.e., very comprehensive—health insurance. And the public policy question is: Should middle-income taxpayers, some of whom are doubtless uninsured, subsidize “Cadillac” health insurance coverage for wealthy executives or labor union workers?
Capping the exclusion at, say, $12,000 for a family—which means employees would pay normal income taxes on every dollar employers spent above that amount—would send a message that the tax code would subsidize good health insurance coverage, but not excessive coverage.
Importantly, employers and insurers would then try to develop coverage that costs less than the cap, which would likely mean basic coverage with a high deductible—perhaps supplemented with a tax-free Health Savings Account for smaller and routine health expenditures. Setting that cap would probably do more to slow the growth of health care spending than all of the nonsense the president and the Democratic leadership are proposing.
Of course, that’s a “policy reason” for considering a cap on health benefits. But that’s not why the president and Congress want it.
They want a cap because it’s the easiest way to raise hundreds of billions of dollars in new taxes so they can spend like drunken politicians. And because increased spending—not good policy—is the motive behind their proposal, the public should oppose it.