Will Taxing Health Care Benefits Pay for Reform?

by Fred Siegmund

The headline in the Washington Post reads “Tax on Health Benefits Weighed” with the subhead “Senator Calls Levy ‘Perhaps the Best Way’ to Pay for Overhaul.”

The qualifier “perhaps”, in this case, means the best we can do given that a majority in Congress wants to avoid raising income tax rates at the top of the Federal income tax scale. The top rate continues to be 35 percent, which began in 2003.

The Internal Revenue Service publishes detailed income and tax data on its website, with the latest detail for 2006. In that year, 940,384 returns had taxable income over $500,000.

Suppose Congress declared a one percent increase in the tax rate for just the taxable incomes over $500,000. Having a 36 percent top marginal rate instead of 35 percent for tax year 2006 comes to $9.5 billion dollars of additional revenue.

Higher incomes in 2009 would make it more than 9.5 billion. Raising the top marginal rate 4.6 percent to 39.6 percent will bring in more than $40 billion. A top marginal rate of 39.6 was the top marginal tax rate from 1993 to 2000.

Congress knows taxing employer health benefits is a regressive tax because employer health care benefits do not go up in proportion to income. Taxing health benefits when benefits decline as a percent of higher income guarantees those with higher incomes will pay a lower percentage of income in tax.

Ignoring dividends and capital gains only makes their proposal more regressive.

Senator Max Baucus, who is drafting the legislation for the Senate, is already retreating and offering moderating qualifications like phasing in, and a “grandfather” clause for union negotiated health plans. Maybe he is anxious making proposals for regressive taxes, but others in Congress are making other proposals.

Other proposals include:

  • higher alcohol taxes
  • a new tax on flexible savings accounts and health reimbursement accounts
  • taxing half of all employer provided health premiums
  • eliminating tax deductions for high medical expenses
  • a “3-cent tax” on sugary drinks

There are many proposals, but they are all regressive and none raise marginal tax rates.

America’s health care is too expensive for millions. To have health care for everyone, some will have to pay more to finance care for others who can only pay less or America will continue to exclude millions.

Americans need to feel concern for their fellow citizens to help pay subsidies, but the regressive finance proposals reflect the attitudes and political strength of the well placed and the well to do.

For a family of four in 2008 using the standard deduction, a 39.6 marginal tax rate instead of the current 35 percent rate increases taxes by $5,615.13 on $500,000 of gross income.

Those high earners do not want to pay and Congress continues to go along. It makes it hard to feel optimism for extending health care to all.

Fred Siegmund covers America’s jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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