Monday, June 8, 2009

Beware of Tax Increases Disguised as Good Health Policy

Many believe we need to use the tax system as a way of reforming the health care system.

The idea is to use tax policy to encourage more efficient benefit plans. It seems to me such proposals make a great deal of sense as part of a more comprehensive reform.

However, I am worried that the Congress will simply raise taxes to pay for health care reform--perhaps as much as half the cost of a new program.

The legitimate policy discussion over using tax policy to encourage more efficient benefit plan designs typically involves taxing "Cadillac" health plans by the amount they exceed a standard offering. Other cutting edge proposals have even gone further by putting the tax benefits of health insurance in the hands of consumers--the Wyden-Bennett Healthy Americans Act for example.

But the tax we appear to be headed for is just a tax on high-income people. That scheme calls for phasing-out the longstanding tax exemption for health benefits--perhaps single people earning more than $80,000 a year and families making $160,000.

That is not a new tax policy designed to encourage a more efficient health care system--it's just a tax increase. It would begin on the "rich" but it wouldn't be long before bracket creep captured more and more middle income families just as the alternative minimum tax (AMT), originally designed to tax the rich more, has made its way to the middle class.

Today, the Kaiser Health News (KHN) published a column by me dealing with this concern titled, "Health Care Reform or Just Expensive Entitlement Expansion."

Here are a couple of my points:

Consider this, during the last 10 years worker earnings have grown 34 percent, general inflation was up 29 percent, but health insurance premiums were up 117 percent.

How would you like your taxes tied to health insurance premium increases? That is what could happen if the Congress backs the leading proposal by paying for almost half of a health bill with income tax increases—specifically by capping the longstanding tax exclusion on health care benefits for higher income tax payers.

I expect to see a health care bill emerge with a little cost-containment window dressing, a modest shaving of what providers get paid today, and lots of tax increases which would have nothing to do with changing incentives toward making the system more efficient.

You can read the entire column here.

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