The "Taxing Health Care Benefits" Minefield

To be clear, absolutely nobody on the Democratic side is proposing to "tax your health care benefits." That's just a distortion. The idea that David Axelrod refused to rule out on George Stephanopoulos and which John Podesta and Tom Daschle endorsed yesterday involves the employer deduction for health care benefits. Right now, all of them are available for deduction; the plan I've seen would be to cap that deduction.

The current break is the largest subsidy in the tax code; with tax-free benefits going to about 160 million Americans, the government forfeits roughly $250 billion a year. Most economists argue that the tax break fosters costly insurance plans, discourages price-shopping and encourages overspending on health care.

The framework that Mr. Daschle and Mr. Podesta outlined in a meeting with reporters proposed two ways to raise revenues from employer-paid health coverage: Their preferred option would limit the business deduction that employers could take for insurance coverage. The alternative would require employees to pay more taxes, by capping the amount of their coverage that is tax-free.

I don't even think that's right. Employees don't currently take a deduction on their employer-provided health care; the employers do. They would be the ones who would see the deduction capped. That money would likely be passed on to employees, but not with higher taxes but reduced benefits to keep them under the deduction cap. Arguably, this would take care of itself if premium costs are lowered. And actually, Podesta and Daschle's framework would only have such caps kick in if health care spending outpaces a specific growth rate.

Bottom line - unions don't want this. They worked hard to get very good health care benefits from employers, sometimes sacrificing salary increases to do so, and don't want to see them cut. That's what's between the lines of this Jane Hamsher post.

You can then say that unions don't want a fundamental shift in health care reform. The employer-based system works for them, because they can bargain for benefits. But it doesn't work for the over 50% of the country who don't get health insurance from their employer or don't get it at all. The employer-based relationship leads to bad outcomes, and is based on a WWII-era quirk to avoid wage controls. Single-payer health insurance, the preferred progressive option, would also nullify all of those union health care contracts. It's worth debating whether the employer-based system should go, actually.

I don't necessarily agree with this notion that health care must be paid for when unnecessary wars and financial industry bailouts aren't. But I don't think it's worth shielding tax deductions from a cap at the expense of 100 million Americans who have no insurance or unacceptable insurance, and ought to have health care available to them as a basic right.