Bush plan would tax health insurance


Published: Sunday, January 21, 2007 at 6:01 a.m.
Last Modified: Sunday, January 21, 2007 at 12:00 a.m.

WASHINGTON — President Bush intends to use the State of the Union address on Tuesday to tackle the rising cost of health care with a one-two punch: tax breaks to help low-income people buy health insurance and tax increases for workers whose health plans cost more than the national average.

Facts

How it would work

  • The basic concept of the president's plan is that employer-provided health insurance, now treated as a fringe benefit exempt from taxation, would no longer be entirely tax-free. Workers could be taxed if their coverage exceeded limits set by the government. But the government would also offer a new tax deduction for people buying health insurance on their own.
  • The administration would cap the amount of benefits that can remain tax free at $15,000 for a family and $7,500 for an individual. Anyone whose health insurance costs more than that would pay taxes on the difference. For example, a family with coverage costing $16,000 a year would pay taxes on $1,000.
  • The cap would also be used to establish the amount of the new deduction for people who lack coverage. In this example, a family buying insurance on its own could take a $15,000 deduction — even if the insurance cost less.

"I will propose a tax reform designed to help make basic private insurance more affordable," Bush said in his weekly radio address on Saturday, "whether you get it through your job or on your own." He did not offer specifics, but an administration official provided details of the plan late Friday afternoon.

As he heads into the address, his first delivered to a Congress controlled entirely by Democrats, Bush faces intense skepticism from lawmakers over his new strategy in Iraq. But while he will not be able to avoid the subject of Iraq in the speech, White House officials hope to use the address to shift the national conversation away from the war and toward the possibility of bipartisan cooperation in Washington.

The basic concept of the president's plan is that employer-provided health insurance, now treated as a fringe benefit exempt from taxation, would no longer be entirely tax-free. Workers could be taxed if their coverage exceeded limits set by the government. But the government would also offer a new tax deduction for people buying health insurance on their own.

The plan is a startling move for a president who has repeatedly vowed not to raise taxes. And it is certain to run into opposition from business groups, labor unions and, most of all, the Democrats who now run Capitol Hill.

"It's a bad policy," Rep. Charles B. Rangel, D-N.Y., the chairman of the House committee that writes tax legislation, said in an interview Friday night. "We are trying to bring tax relief to the middle class. The president is trying to increase their tax liability. This proposal is inconsistent with what the majority is seeking in the House and the Senate."

White House officials say the health tax plan would neither increase spending nor reduce tax revenues. Supporters say it would expand coverage to some of the 47 million uninsured. But critics say it would, in effect, tax people with insurance to provide coverage to those without it.

That would amount to a tectonic shift in the way people get and pay for their health coverage, and historically it has been all but impossible to win congressional approval for such changes. When President Ronald Reagan made a proposal similar to Bush's in 1986, it died in Congress, with Rangel helping to lead the opposition.

In his radio address on Saturday, Bush described his proposal as a way to "treat health insurance more like home ownership," giving people tax deductions for their health insurance in much the same way as they get tax deductions for home mortgage interest. He said the current system "unwisely encourages workers to choose overly expensive, gold-plated plans," driving up the overall cost of coverage and care.

The federal government does without tens of billions of dollars each year in potential tax revenue by making health coverage tax-free.

The idea of limiting such tax-free coverage has circulated in various forms for more than two decades and is "quite controversial," said Dr. Mark B. McClellan, a former White House economist and Medicare administrator, who has consulted with Bush officials on the plan. "The conventional wisdom is that there would be too much political opposition to propose" such limits, McClellan said.

In preparation for the president's speech, the White House has been shopping the idea around Capitol Hill, trying to sound out lawmakers like Sen. Charles E. Grassley of Iowa, the senior Republican on the Senate Finance Committee, and Sen. Ron Wyden, D-Ore., who has drafted his own health insurance plan.

The administration official said Wyden's plan contained tax provisions similar to the one proposed by the president. But in an interview, Wyden was skeptical. He said any tax changes must be coupled with regulations that would encourage private insurance companies to offer affordable coverage to people with pre-existing health conditions.

"The market is broken," Wyden said. "Private insurance companies cherry-pick. They're trying to take just healthy people and send fragile people over to government programs more fragile than they are, and I'm not sure what this does to fix the broken market."

The Census Bureau estimates that 175 million Americans obtain private health insurance through employers, while 27 million people are covered by insurance bought outside the workplace. The rest, with the exception of the 47 million uninsured, are covered through government programs like Medicare and Medicaid and military health care.

Under Bush's proposal, individuals buying health insurance on their own would receive a tax break similar to the one that has historically been available to people who receive coverage through their jobs. The plan is tied to the average cost of family health coverage, which is currently $11,500 a year.

It would work like this: The administration would cap the amount of benefits that can remain tax free at $15,000 for a family and $7,500 for an individual. Anyone whose health insurance cost more than that would pay taxes on the difference. For example, a family with coverage costing $16,000 a year would pay taxes on $1,000.

The cap would also be used to establish the amount of the new deduction for people who lack coverage. In this example, a family buying insurance on its own could take a $12,000 deduction — even if the insurance cost less.

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