As this discussion demonstrates, there is a growing consensus that refundable tax credits would be preferable as a means of subsidizing health insurance to the current open-ended, regressive, inflationary tax subsidies for employment-based coverage.

• Tax credits are worth more to those with lower incomes who are more likely to be uninsured and for whom tax deductions are of little value.

• Because credits are more visible than the hidden tax exclusion, they create new incentives for workers and employers to work together to seek the best value in health spending. This would, in turn, begin to reverse the tide of a growing share of workers’ pay raises being consumed by ever-rising health insurance costs.

• Credits are portable and therefore are more appropriate than an employer mandate for a mobile workforce in which four in ten workers change jobs every year.

• Refundability is key because it provides the full value of the subsidy to those who may not owe enough in taxes to otherwise qualify for the full credit.

• Having a fixed, portable subsidy would mean that individuals and families could find new groups through which to buy coverage, such as churches, labor unions, or professional associations, that may be more stable forces in their lives than their jobs and therefore provide greater continuity of coverage. It’s vital that individuals and families be given a wide range of options to obtain coverage that suits their needs and their pocketbooks.

A report issued this week by the Urban Institute adds further evidence that it is more efficient to target subsidies to individuals and families than to employers.

Linda J. Blumberg and John Holahan argue in “Targeting Subsidies: Employers versus Individuals” that, “Individual subsidies will lead to less displacement of private spending and will be more equitable. Employers have limited information about their workers, making employer subsidies more difficult to target to individuals with the greatest needs. In addition, employer subsidies do not eliminate the need for individual subsidies.”

We can work on the next steps for implementation, but this discussion shows that refundable tax credits for individuals and families to purchase insurance will be important in the health reform debate moving forward, as the Health Policy Consensus Group has argued since it first released its Vision Statement on Consumer Driven Health Reform in 1994. http://www.galen.org/content/CGvision.html

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There are merits to using a tax deduction and a tax credit, or a combination of both. For those who are in a public program, like SCHIP and Medicaid, a straight refundable and advanceable tax credit makes sense. They should be given the financial means to purchase their own insurance or to buy into employer coverage if it is offered. For those who are below a certain income level, but earn too much to quality for public assistance, they too should receive a refundable and advanceable tax credit.

For those who get insurance through their employer or on their own, a tax credit or deduction would give them more control over their healthcare decisions. However, there are some significant questions to answer. What happens if a tax credit or tax deduction is not enough to cover a policy in the individual market? Will a tax credit be indexed, and if so, to what? If an employer contributes to an employee’s HSA or HRA, will the employer contributions remain tax-advantaged? Will the employee’s contributions above the tax credit balance remain tax-advantaged? How will a tax credit or tax deduction affect the self-employed from an employer perspective?

Yes, there should be equal tax treatment regardless of where Americans get their health insurance. Democrats would support tax changes that support public programs as well as those citizens who cannot afford health insurance. Republicans would support more control over decision-making for those who get coverage through their employer or on their own. Yes, we should makes substantial changes to the tax code, if we can properly answer these questions and many others on how exactly it will work.

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Is there a sensible way to change the tax treatment of health care that would be palatable to both Republicans and Democrats?

Yes. But it must be part of a total package that makes sense, and cannot be limited to changing the tax treatment alone. The current tax exclusion is the glue that holds employer risk pools together; it would be folly to “level the playing field” by equating the tax treatment for group and non-group insurance, while leaving the non-group market alone (or worse, allowing insurers to sell across state lines).

If we are going to change the tax treatment of health care, we must simultaneously create an insurance market that works for everyone. By “works,” I mean, extends the benefits of the employer system – large, accessible risk pools (i.e., guaranteed issue and modified community rating), administrative efficiencies, and economies of scale – to all. Democrats will never sign on, nor should they, to any tax change that is not designed to ensure that all Americans will have affordable health insurance. And Republicans will never sign on, nor should they, unless private insurance market competition is at the core of the final policy proposal.

The financial sector rescue package and now the deepening recession do indeed intensify the short run fiscal challenge of expanding coverage and investing in delivery system infrastructure. But even before the startling events of the last few weeks, redirecting the current regressive tax expenditure to subsidize health insurance more fairly and efficiently -- in the context of new markets that work for all -- made perfect and bipartisan sense to me. And I am not and have not been alone among analysts who favor covering all Americans.

Opposition to tapping this source of funding is predictable, and some concerns do deserve serious thought and design work. Nevertheless, there is no question that current economic circumstances have increased the opportunity cost of new and sustainable financing sources. Therefore, those who are in favor of reforming our broken health system should consider the possibility of using the available tax exclusion money to finance health reform (under the circumstances I have described above) with an open mind. And it is important to remember that there are several viable approaches to changing the tax treatment of health insurance – income and benefit related caps, a transitional phase out and cash out, and an eventual elimination are all options that should be considered.

As we approach this important national conversation once again, we should be honest about what the current tax treatment does and what changing it will do, firm in our commitment to health insurance markets that are accessible and affordable for all, and optimistic that with enough practical open-mindedness we can build a sustainable health system that will serve Americans well in the 21st Century.

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Is there a sensible way to change the tax treatment of health care that would be palatable to both Republicans and Democrats? Not based on what we have seen throughout this campaign season.

The emerging consensus position appears to be that it's okay to reload the tax subsidy vending machine with more dollars and spread the paper wealth around, AS LONG AS no one not only never ends up getting anything less than promised under current law, but gets even more! Consider this strange season of political rhetoric in which one is supposed to believe that Republicans, amazingly enough, are in favor of a more progressive distribution of tax subsidies relative to income. Democrats are repositioned as defenders of the downtrodden upper-middle class. Traditional business interests prefer the costly health insurance devil they dislike to the competitive unknown they detest. Well, at least some things don’t change much….

In such a world, it appears that not even the mighty power of efficiency-seeking health economists (all ten or twenty of them) can overcome the short-term momentum of zero-sum scrambling for higher perches on the tax subsidy food chain. Let's face it: the argument for efficient spending of health care dollars means LESS spending on health services, and the only people we generally allow to do that are much poorer than the average voter.

So let's drive this unusual array of forces on the current political playing field toward the illogical conclusion they seek, and almost deserve, by considering (not too seriously) the following modest proposal:

(1) Just increase the current tax exclusion for employer-sponsored health insurance (ESI) so that it treats everyone covered by ESI as if they are in the top marginal income tax rate bracket. That rate, by the way, could be due for quite an upward ride under certain political scenarios.

(2) Holy smokes! How would we pay for this while we are armpit-deep in debt? Just remove any other tax expenditure support for anything else related to health care in the current tax code (with one exception), and eliminate any public funding (through the tax code or other public health programs) for anyone between the ages of 18 and 65 who is not disabled -- i.e., workfare for health care. (And if that's not enough, keep cutting elsewhere because nothing is more important than subsidizing health insurance coverage, right?)

(3) What about those handful of worker bees who can’t join the full tax subsidy party (those social outcasts who either refuse to join employer risk pools or are not welcome in them, sometimes called “individual market” purchasers)? To avoid being too cruel, we could, to be serious for just a moment, allow individuals not offered ESI to deduct the cost of their health insurance premiums from federal income taxes (according to their real tax brackets) and subtract the value of those individual market premiums from their wages subject to FICA taxes. But this advantage -- deliberately less generous than those for workers with better jobs in bigger firms -- would last only as long as they remained continuously covered (HIPAA-like rules). With such continuous coverage, they also could be protected against pre-existing condition exclusions for conditions developed AFTER they were first insured as individuals. If they switched policies, actual coverage under the new policy could be no more generous or comprehensive than coverage under the previous policy for at least one year.

Would this work? Maybe for a few years, for those fortunate Americans who still could find a job yet also remain in the growing near-majority of Americans who don't pay any significant federal income taxes. Until health care costs and health insurance premiums took back most of those larger tax subsidies in revenue extractions that deliver more health care but not better health. In other words, business as usual, but at a faster speed.

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Changing the tax treatment for employer-sponsored health insurance is likely to happen if, as I believe, health care reform receives serious attention in the very near future. At least two reasons compel this conclusion: first, the tax exemption is decidedly regressive; and second, it is a huge source of foregone revenue. A third reason also suggests the likelihood of change, namely that it provides an inequitable tax advantage over other forms of coverage.

That said, both substantive factors and political practicality suggest that any change must be undertaken carefully and not too precipitously. A total elimination of the exemption -- even when coupled with a progressive, refundable tax credit -- is not likely to occur in the near future. Moreover, it shouldn't.

Since most people receive their health coverage through employer-sponsored insurance, we should be cautious about a quick or total elimination of the exemption. We simply know too little about the unintended adverse consequences of such a radical change -- especially how it might jeopardize employer-sponsored health coverage that many people would like to retain.

On the other hand, some form of cap on the exemption appears to make good sense. It is a way of providing more progressivity to tax treatment of health care. Over time, it also opens the opportunity of providing a meaningful (i.e., substantial, refundable, and advanceable) tax credit for people who need subsidization of premiums and out-of-pocket costs, and it could help finance much-needed expansions in public health coverage for the poor.

The policy debate will no doubt focus on the type of cap to be established, the size of the cap, and how a cap should be updated. If done in a meager manner, it will neither make significant improvements in achieving equity and progressivity nor will it provide the needed help for extending health coverage to those who can't afford it. If done too broadly, it could undermine existing coverage.

After November 4, the time will come for a careful and thoughtful dialogue about how to proceed.

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Leveling the playing field for those who purchase health insurance on their own is an important step toward achieving universal coverage. Workers who access coverage through their employer are able to do so with pre-tax dollars. This same incentive should be available to those who purchase individual coverage.

The American people want health care reform that builds on what works in the current health care system. Strengthening employer-based coverage and making individual coverage more affordable need not be competing priorities. Along with a stronger safety net, we should see them as integral components of a workable solution that ensures all Americans have affordable health care coverage.

Perhaps John Goodman’s goading of left-of-center bloggers will provoke some additional commentary on health care tax policy, but if he and his colleagues addressed the credibility gap on the right, it might be easier for everyone to give their health policy ideas a fair shake. Here are my doubts about the plausibility of their ideas:

1.) When did the right become redistributionists? Outside a group of well-meaning health policy advocates, right-wingers have advocated a flat tax and opposed income redistribution through tax policy. Sen. McCain has been continuing that tradition in his campaign despite his redistributive health care tax policy.

2.) When Republicans controlled both chambers of Congress, why did President Bush fail to lift a finger to pass his initial health insurance tax credit proposal? It would have faced much less opposition than his subsequent tax credit proposal, which Sen. McCain has adopted, because it didn’t involve taxing employees' health care benefits.

3.) Where is the constituency for Sen. McCain’s health care proposal? It has failed to garner support among even traditional GOP constituencies such as the business community.

I very much hope that we can salvage a role for tax policy in the health care debate, but it’s hanging by a thread. I suggest we focus on practical ideas with an eye towards how they can be enacted.

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Marilyn, you may have inadvertently uncovered a fascinating sociological phnenomena. The $250 billion a year tax subsidy for private health insurance is surely the most regressive and least defensible health policy we have.

Yet here we are on Wednesday morning and not a single left-of-center blogger has had a word to say about it (unless you count the apolgetics from Dave Kendall).

I actually debated Jon Gruber on this and other topics on the Wall Street Journal Report this past weekend. You can access the video here:http://www.john-goodman-blog.com/health-reform-debate-on-%e2%80%9cwall-street-journal-report%e2%80%9d/

A consensus on reforming health care tax policy may be possible after the election, but right now the issue is radioactive thanks to the presidential debate.

Sen. McCain’s proposal to tax health care benefits and offer individuals a tax credit threatens employee’s coverage at work. That’s what independent analysis by John Sheils and others show and what leading employer groups like the U.S. Chamber of Commerce believe as reported in the NY Times.

Republican ideology has blinded the GOP to the lesson Democrats learned in 1994: Americans may be afraid of losing the coverage they have, but the unknown can be scarier.

To build public confidence in an alternative to job-based coverage, we should use a voluntary approach as Sen. Obama proposes. The alternative will be more attractive to many workers if it avoids the deficiencies of job-based coverage: no portability of coverage from job-to-job, little individual choice of health plan, and one-size-fits-all benefits.

Health care tax policy is an attractive place for policy wonks to do one-stop policy shopping, but for that very reason, it’s nearly impossible to succeed politically with it. Tax-free employer-provided health care benefits represent the very foundation of the current health care system, so any change to it will necessarily be disruptive. That’s why Sen. McCain’s aggressive proposal doesn’t create the political space needed for reform.

Regardless of who wins in November, taxing health care benefits is unlikely to be popular with members of Congress from either party. Sen. Obama’s ads against Sen. McCain will be fresh in their mind, and they won’t want to see their opponents in the next election running the same ad.

The way back to get back to progress on reforming health care tax policy is to go after on its most glaring weakness. The fact that taxpayers in high tax brackets get a big tax break while workers without health insurance get nothing ought to be a big concern among Democrats. Indeed, while running for president, Sen. Hillary Clinton proposed to limit its value to upper-income employees.

Sen. McCain might have emphasized how his health insurance tax credit proposal would redistribute taxpayer money from the rich to the poor, but that would contradict his criticism of Sen. Obama for using public policy "to spread the wealth around."

As Stuart Butler suggests, we should also limit tax-free benefits based on the breadth of coverage, but let’s not be politically deaf and propose to tax the generous benefit packages that workers feel they have worked hard to earn. Instead, the limit should be based on evidence-based definitions of essential benefits. That way, the argument is about ending the federal tax subsidy of health insurance that covers services that are wasteful.

Finally, as Rep. Jim Cooper rightly argues, we need to make workers aware of the value of the health benefits they receive. All workers should receive an annual accounting of the value of employer-provided benefits. With that information, employees could see how changes in tax policy would affect them. Without a point of reference for the public, the health care tax policy reform debate will be ungrounded and easily exploited by both sides.

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Reforming the tax treatment of health care would help advance the goal of achieving health care coverage for all Americans. Both presidential campaigns have expressed support for tax credits. In a questionnaire provided to the AMA by both campaigns, and available online at the AMA’s Voice for the Uninsured Campaign Web site (www.voicefortheuninsured.org) , Senator McCain replied in part, “I will provide universal and fairer provision of the tax-subsidy in the form of a $5,000 refundable tax credit ($2,500 for an individual) that will be available to every American, in the same amount for rich and poor, and regardless of the source of their private insurance coverage.” Senator Obama replied in part that “Individuals and families who do not qualify for Medicaid or SCHIP but still need assistance will receive income-related federal subsidies to keep health insurance premiums affordable.”

The AMA supports refundable, advanceable tax credits that are inversely related to income. We also support capping the employee tax exclusion for employer-sponsored health insurance as an incremental way of generating revenue to offset the cost of the tax credits.

Senator Wyden’s legislation to cover all Americans has achieved bipartisan support in the Senate, and I was honored to stand with him and Senator Bennett at a press conference last month aimed at reaching a bipartisan commitment to action to cover the uninsured in 2009. While there are differences among the political parties, and among the many health care stakeholders, there has never been a better time or chance for action to cover the 45 million Americans without health insurance. We must find a way to common ground, for the sake of the many Americans who live sicker and die younger, simply because they do not have health insurance.

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The McCain tax credit proposal is similar to the tax credit legislation introduced in Congress by Senator Coburn of Oklahoma (S. 1019). Like the McCain plan, the legislation would establish a fixed tax credit for all Americans with private insurance (excluding Medicare supplemental). The Coburn proposal eliminates the tax exclusions for employer provided health benefits for both the income tax and the Social Security and Medicare payroll taxes. We estimated that the Coburn program would reduce the federal deficit by $480 billion over ten years.

So if the Coburn bill reduces the deficit by nearly one-half trillion dollars, how is it that the similarly conceived McCain tax credit would increase the deficit by $2.05 trillion over the same period? Figure 1 is a “bridge” table that reconciles our estimates for McCain with those for the Coburn proposal.

Figure 1
Bridge Table from Coburn Flat Tax Credit Proposal to McCain Plan: 2010-2019
(billions)
Federal Spending
Coburn Federal Tax Credit: 2010-2019 ($480)

Added Cost Features under McCain Proposal
Retain Payroll Tax Exclusion $1,116
Retain FSA and Current Health Deduction $156
Increase in Credit Amounts $589
Permit HSA Contributions $285
GAP Subsidies $235
Private Coverage Option for Medicaid $150
Total Additions $2,531

Coburn Federal Tax Credit 2010-2019 $2,051
Source: Lewin Group estimates.

The most important difference is that, unlike the Coburn proposal, the McCain plan retains the payroll tax exclusion for employer provided health benefits. This reduces revenues under the McCain plan by $1.12 trillion over the 2010 through 2019 period. The McCain plan also retains the health expense deduction and tax exempt flexible spending accounts (FSA) for health, both of which are eliminated under S. 1019. This increases costs under the McCain proposal by an additional $156 billion over ten years.

The tax credit under McCain ($2,500 single, $5,000 family) is also a bit larger than under Coburn ($2,000 single, 5,000 family), which adds about $589 billion to the cost of the McCain plan. Also, unlike Coburn, the McCain proposal would permit people to retain the difference between the credit and the premium (if any) as a deposit in a Health Savings Account (HSA), which adds costs of $285 to the McCain proposal.

The McCain proposal also creates a Guaranteed Access Plan (GAP), which provides federal subsidies for new or expanded high-risk pools, with federal costs of $235. In addition, the McCain plan permits states to use Medicaid funds to purchase private insurance for Medicaid enrollees with the aid of the federally funded tax credit. While state Medicaid spending is reduced under this provision, the program adds $151 billion to federal costs under the McCain proposal.

The flat tax credit proposal as originally conceived has important advantages. Replacing the open-ended tax exclusion for employer benefits with a fixed tax credit creates new incentives for employers and consumers to seek-out more efficient lower-cost health coverage. The flat tax credit promotes tax equity by extending a tax benefit to people without employer insurance who must purchase coverage on their own in the non-group market. Because it is “refundable,” it also provides a greater share of tax benefits to people with low- to medium-incomes. I hope we will be able to revisit the flat tax credit model in the coming debate.

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Despite Obama's shrill criticism of changing the tax treatment of health insurance, he will almost certainly find that this is one of the few sources of substantial funds for even a modest health reform. However, there is a competing demand for funds that may be more compelling to Congress. A permanent solution to the growing reach of the Alternative Minimum Tax into the wallets of the middle class will require an offset about the same order of magnitude as the employer exclusion. While it would not be an even trade, indexing the AMT and capping the employer health insurance exclusion would both have their major impacts on the same group: middle-class Americans. A cap on the value of the exclusion in the next administration (regardless of who wins in November) may well be the key to tax reform, not health reform.

Although no one wants to eliminate employer-sponsored health insurance, it is collapsing of its own inefficiency and inequity as more and more employers have to drop coverage. Once the recession kicks in, there will soon be well over 50 million uninsured, perhaps even 60 million. American competitiveness is threatened unless we change.

The hidden $200+ billion annual tax exclusion that has propped it up for decades was never approved by Congress, and could never be if Members knew that it gave the biggest subsidies to the highest-paid workers at the largest firms. Our entire "system" for subsidizing care is the result of an unrelated World War II policy!

As the Obama Administration fulfills its promise to cover the 46 million uninsured, it will need at least $150 billion in funds to pay for their insurance, as well as lots more primary care providers to meet the surge in demand for medical care from the newly insured. What better way to pay for universal coverage, without a tax increase, than by redistributing the benefits of perhaps the most regressive tax break in the U.S.? This could be a win/win solution.

Obama knows that such a change could not even be contemplated until the private insurance market is thoroughly reformed so that coverage is more affordable for everyone. He knows that individuals should be able to get the benefit of a large risk pool with near-community rating, insurance companies should no longer compete to drop the sick and injured, and insurers should be rewarded for funding excellent care whenever it is needed.

As a first step for change, I have long advocated (and introduced as legislation) including the employer-sponsored portion of the employee's health insurance benefit on the employee's W-2 form. This crucial bit of information is, otherwise, not available on any official piece of paper in the employee's life. That is, unless they lose their job and they discover the cruel reality of COBRA coverage -- the true price of health insurance -- for the first time, and at the worst possible time. My reform would not involve any tax changes, only improved transparency.

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There is widespread, bipartisan consensus that comprehensive health care reform needs to treat healthcare benefits the same way we treat salaries and other benefits provided by employers. If done correctly, changing the tax treatment of health insurance can decrease taxes for most working Americans, and provide the assistance necessary to help millions more be able to purchase health insurance.

Right now about 60 percent of folks under age 65 are getting their health insurance through their job. The question is, why? The answer: Because the tax code is biased towards Americans that get their health insurance at work. The Joint Committee on Taxation has defined this bias to be worth about $3.6 trillion over ten years. To put that number in perspective, that is about $12,000 for every man, woman, and child in America! Wouldn’t that money be better spent if it benefited more Americans?

Our current tax policy grew out the wage and price controls during World War II, which created incentives for individuals to get their health benefits through their employers. This policy, however, penalizes individuals that aren’t offered health insurance at work. Experts from both sides of the aisle agree -- we need to reform our flawed, unfair tax code so that individuals who do not receive insurance through their employer can purchase it without being penalized by the IRS. If you work hard to provide a living for yourself and your family, the government should make it easier – not harder! – for you to afford health insurance.

Changing how health insurance is taxed will also help to slow the growth in health care costs. Sky-rocketing health care costs are making health insurance unaffordable for many working families and forcing small businesses to drop coverage. Equalizing the tax treatment of health care would for the first time put significant pressure on insurers and health care providers to provide greater value. It will also encourage employers to develop more entrepreneurial, market-based solutions to slow the growth in health spending, including promoting prevention and providing better care for high cost, chronically ill workers. That is a far better approach than more government price controls and increased reliance on government bureaucrats.

My comprehensive health care reform bill, 10 Steps to Transform Health Care in America (www.enzi.senate.gov/10steps), would convert the current tax benefits that only go to folks who get their insurance at work into a standard tax deduction that applies to anyone who has health insurance – regardless of where they get their health insurance. The bill also gives low income Americans the option of getting a refundable tax credit. These two changes will help everyone afford health insurance and will make health insurance more portable. No one should be stuck in a job they hate because they’re afraid that if they take a better job, they will lose their health insurance. Yet millions of Americans face this “job-lock” dilemma.

Despite what’s being touted in recent negative ads, neither my proposal nor Senator John McCain’s will alter the way employers treat health insurance. Rather, both plans provide more options for individuals who don’t currently have insurance through their employer. Hopefully next year we can reconsider this fundamental change to level the playing field for the 47 million Americans who don’t currently have health insurance -- everyone should be treated equally.

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Health insurance coverage should be expanded in the private, market-based system through new refundable tax credits targeted at low-wage small businesses. Individual subsidies for low- and moderate-income families to purchase coverage on their own or through new pooling arrangements could also be considered. Both Democrats and Republicans have proposed such tax credits and subsidies.

I believe Stuart's approach is too timid. The social interest in whether someone has health insurance is largely independent of income. That is, a $100,000 a year family can incur medical bills it cannot pay almost as easily as a family earning $20,000.

So the best approach is for government to give the same encouragement to everyone -- as John McCain has proposed. The worst approach is to tax capital to pay for selected subsidies -- as Barack Obama and Hillary Clinton have proposed. See my blog comment on this very topic today: http://www.john-goodman-blog.com/

Reforming the tax treatment of health care has had broad bipartisan support for years among health experts, and more recently among politicians. In tight budget times it makes sense to redesign this $200 billion tax break that is regressive, inequitable and fuels excess health spending. McCain sees it as a core part of his plan. Obama economic guru Jason Furman envisions replacing the individual tax exclusion for employer-sponsored coverage with a credit or other subsidy, as I have supported. Even Hillary Clinton wanted to cap the exclusion during the primaries.

How best to do it? As part of overall tax reform as well as health reform. Capping the tax exclusion by income and also by generosity of coverage and indexing the cap by CPI rather than health inflation would enable people to adjust over time. The revenue would be used to phase in tax credits focused on the lower-paid and those without employer coverage. Many Republicans see this as a step to empowering families with greater choice and control of health dollars. Many Democrats see it as making the tax code more progressive and making increased coverage possible with less impact on the deficit. There are the seeds for agreement.

To be sure, Democrats maintain – and most Republicans agree – that in addition to reforming the tax subsidy there must be steps to reform the insurance system to ensure that there is affordable coverage available for families armed with a credit. There is lots of disagreement about how to do that. But there can be agreement that we should reform the tax treatment of health to make it look like we actually had a goal in mind.

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