Describing his financing options for health reform yesterday, Senate Finance Committee Chairman Max Baucus (D-MT) delivered two messages: A) Eliminating the tax exclusion for employer-sponsored health care is off the table and B) He would still like to find a way to curb this hugely expensive and inefficient subsidy.
Baucus' bipartisan alternatives for limiting the exclusion cover the proverbial waterfront. Congress could cap the subsidy based on the value of the insurance plan, the income of the policyholder, or both. It could index the cap based on health care inflation, the consumer price index, or growth in GDP. It could “grandfather” existing union-negotiated plans, or not. What Baucus seems to be saying is: I’ll do whatever it takes to reduce the value of the exclusion, even if it is only a small step toward eventual repeal.
The differences among these designs may seem technical, but they make a huge difference in terms of fairness, the future of health coverage, and the amount of money they raise.
Take the dollars. TPC has looked at several of Baucus' options. Repealing the exclusion outright would generate $3.5 trillion over 10 years, more than enough to pay for any reasonable health reform. Freezing the exclusion at today's level without adjusting the cap for inflation would generate about $1.1 trillion. Because health care costs rise so much faster than overall inflation, indexing the exclusion to CPI would still produce about $850 billion. But linking the cap to the annual health cost increases would produce only about $165 billion.
But it is about more than just revenues. Think about two ideas—tying a cap to the value of insurance or linking it to the income of the policyholder.
Congress could accomplish the first by allowing taxpayers to exclude from income only the value of insurance equal to the standard health plan offered to federal employees. In other words, workers would have to pay tax on plans that are worth more than the coverage lawmakers themselves get. It is not so easy to compare the actuarial value of insurance provided by a five-employee company with the federal government plan, but it is possible. And it would roughly accomplish the goal of curbing tax subsidies for “gold-plated plans.” This design, however, would also raise questions about what to do about people who live in places where the cost of medical care is unusually high.
Alternatively, Congress could cap the tax subsidy only for high-income taxpayers, no matter what insurance they buy. This is yet another tax increase on the rich, but it is hard to see how it would encourage a more efficient health system. It is easier to imagine business owners dumping coverage if they have to pay higher taxes on the benefit than their workers.
This is complicated stuff. As it happens, I moderated a panel this morning on tax subsidies for health care. I asked my fellow panelists what they’d do with the exclusion. All agreed that it has got to go, at least over time. But when I asked what kind of a cap they preferred, one voted to tie it to premiums, another preferred linking to income, and the third favored a combination. I suspect Congress will have just as hard a time reaching a consensus on this.
