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

{ 3 comments… read them below or add one }

Brad June 23, 2009 at 12:05 am

Personally I do not think the Government should even be in the business of trying to cover everyone, nor should it be robbing from the rich to give to the poor.

There are already failed Government programs in place for those that need it, why create another one? Most importantly, why ruin the best health care system in the world? The one we have just needs to be fixed not changed. If the Government does anything they should find a way to make the current health care more affordable for all.

Why not make people realize that instead of waiting for an inept Government system that has failed in almost every program it has created to “save” the poor, teach them to make better decisions with their money. No stupid lottery, no brand new cars, no bloated mortgage, and no expensive toys. First health insurance, then toys. It’s about priorities!

STUPID SOLUTION: Asking the same government that spends too much, can’t budget for crap, wastes more money than could help ALL the poor people in America ten fold, and is ineffective at running or maintaining ANY Government program to fund and keep afloat yet another Government program.

Louis June 23, 2009 at 1:43 am

Leaving the politics of health care reform aside, the argument you make about raising marginal tax rates from 35% to 39.6% is not a possible solution for funding health care (estimated to costs anywhere from $1 – 1.6 Trillion).

Tax reform bills can either be permanent provisions or expiring (“sunset”) provisions depending on the method and number of votes the bill gets when it passes through Congress.
When Congress passed the Bush Administration’s tax cuts in 2001 and 2003, they were not passed as permanent tax cuts. Congress budgeted these tax cuts to end in 2010. In other words, if the Bush cuts were not extended by another act of Congress, marginal rates would automatically go back to the rates established under Clinton (39.6% marginal rate). Therefore, when the government prepares their budget every year (generally done in 10 year increments), the calculations for years 2011 and forward are already based off the 39.6% tax rate. As the law stands now, the 39.6% tax rate will be in effect beginning in the 2011 taxable year.

President Obama and Congress have made it clear that they currently do not intend to extend certain parts of the Bush tax cuts and marginal rates will go back to 39.6% in 2011. During parts of his campaign, President Obama hinted that he may raise rates immediately for the highest income tax bracket in 2010, effectively REPEALING the Bush tax cuts a year early. Due to the recent economic conditions, President Obama and Congress did not repeal the tax cuts and simply chose not to extend certain the provisions on the highest income earners. Even if Congress decided to repeal the cuts and raise rates to 39.6% for 2010 as a revenue raiser for health care, the extra revenue or this one year would be no where near the amount to fund health care.

As a result, as you have correctly pointed out, Congress is testing the waters to find ways to fund health care. In Obama’s budget proposal, one of the main revenue raiser for health care was limiting the tax rate at which itemized deductions reduced liabilities to 28%. This did not have much support in Congress originally, but is starting to pick up a little bit of momentum.

While not specifically stated to be used to fund health care currently, last month President Obama unveiled an International Tax reform proposal which was scored at $159 billion by the Joint Committe of Taxation. This could also end up being one of the revenue raisers for health care reform if Congress needs revenue.

It will be interesting to see what happens in Congress and the ways they come up to fund health care. Taxing employer proivded health benefits seems to have the most steam right now. As many newspapers have pointed out, McCain proposed this in his campaign. However, what some of the newspapers are not telling you is that McCain also proposed a $5,000 tax credit to offset the cost. To my knowledge, that tax credit is not associated with Baucaus’s proposal, making the comparison to McCain’s plan unfair in my opinion.

Fred Siegmund June 23, 2009 at 2:09 pm


You are right to point out the tax expiration and the return to the Clinton tax rates. I ignored that partly because it is two years off, but also because it still seems to me that marginal tax rates are something the Congress wants to avoid talking about. The millions without health care will not have it without some better sense of community and the willingness of those with more to help those with less. In effect, the Baucus proposal has the working and moderately well to do subsidizing those without jobs or with jobs without health care. It is better than nothing, but I see the failure to discuss plans that will tax the very rich as a political favor. Right now those who work without health insurance pay 1.45 percent payroll tax to subsidize health care for those already retired, but also they pay higher tax rates to pay for the employer sponsored benefits for those of us who do have health care. I see the status quo as the poor subsidizing the rich. I don’t see it as private enterprise as many claim. Like you say we will just have to wait and see.

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