Limiting The Employer Deduction

I don't know what the hell Max Baucus is up to, particularly because he's trying to reach compromise with a group of conservative Republicans whose goal is to talk any bill to death. But in a world without Republican obstructionism for its own sake, you could actually see a compromise position, where the bill expands coverage while paying for the expansion through reducing internal costs, regulating insurers and capping the deduction on health care benefits. Obviously the public option would remain a sticking point, but in a world where Republicans would allow a bill, you could see some compromise take shape.

But there's a problem with, as those who aren't disposed to the idea call it, taxing health benefits. In reality we're talking about capping or limiting a deduction, one which encourages an inefficient employer-based health care system where costs are not controlled. The problem is that the unions don't want it. They've put together very nice health care plans for themselves, sometimes at the expense of wage increases, and want to hold on to those benefits, or at least not get taxed on them at the high end. And politically, this makes the employer deduction dicey, particularly because unions are running and bankrolling a lot of the pro-reform groups. J. Lester Feder asks unions to relent on this point in the name of getting reform through. He has credibility from being a former steward of the United Auto Workers:

At first glance, this tax break, known as the "employer exclusion," is a great idea. Under the exclusion, a worker who earns an annual salary of $100,000 and receives $5,000 in benefits pays income tax only on the $100,000, not the full amount she receives from her employer. This effectively makes benefit dollars worth more than salary dollars, encouraging businesses to offer benefits. The problem, however, is that only 70 percent of workers have employer benefits, and they tend to be wealthier than workers without employer benefits. The employer exclusion also gives the greatest payoff to the wealthiest people: A worker in the 35 percent tax bracket with a $5,000 benefit package gets a $1,750 tax windfall, but if a low-income worker in the 15 percent bracket were lucky enough to get the same package, he would only save $750 on his taxes. The employer exclusion is a backdoor health insurance subsidy that gives the most help to the wealthiest workers with the best benefits while fully taxing the income of uninsured low-wage workers.

Unions fought hard for health benefits, and they fear employers will stop offering benefits if this tax advantage is taken away. And they're right: Wholesale removal of the employer exclusion without other reforms could cause the complete collapse of the employer insurance system. But only a partial rollback of the exclusion is under consideration as a part of comprehensive health reform. It is hard to argue against taxing a portion of the benefits of higher earners in order to make the tax code fairer and expand coverage for the uninsured. Yes, some unionized workers with benefits would see their taxes go up, but I was taught that we organize to make life better for all workers, not just those in our bargaining units [...]

Unions' fears are not unreasonable, but they are compromising what's best for all workers in order to protect unionized workers. And I'd like to believe that Walter Reuther, the legendary head of the United Auto Workers, would endorse this modest change in order to achieve universal coverage. When most unions had abandoned the fight for health reform in the 1960s because they had already won employer benefits for their members, Reuther launched his own effort to revive national health legislation. Announcing this campaign in 1969, he declared, "The call to greatness must be commensurate with the amount of change that is needed."

Listen to Walter Reuther. There's a reasonable debate to be had about whether taxing benefits will rein in health care spending. But there is no debate that the current system of subsidizing employer health care sustains an inefficient system that privileges high-earners over low-wage workers. If we can get a bill that gets at the employer deduction - even through this idea of taxing of insurance companies on their policies over $25,000 a year - while working to expand coverage to everyone and creating systems like the public option that change incentives around insurance and health care delivery, we'd be a lot better off. Even the unions.