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Democrats considering tax on health benefits

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June 9, 2009

Despite a less-than-rousing reaction from the Obama administration, House Democrats are considering a new tax on employer-provided health benefits to help pay for expanding coverage to the uninsured.

Several officials also said an outline of emerging legislation envisions a requirement for all individuals to purchase affordable coverage, with an unspecified penalty for those who refuse and a waiver for those who cannot cover the cost.

"There’s no sense having a mandate unless you have a contribution," Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, said Monday. He referred to the suggestion as "play or pay."

Rangel and other senior Democrats arranged to bring members of the party’s rank and file up to date at a midday session Tuesday on the effort to draft health care legislation at the top of President Barack Obama’s agenda.

No details were available on the possible tax on health benefits, and several officials stressed that no final decisions would be made for several days.

The idea has been gaining currency in recent weeks as Congress intensifies its search for more than $1 trillion to help pay for a health care overhaul.

Sen. Max Baucus, D-Mont., first floated the idea several weeks ago, and emerged from a White House meeting last week saying Obama was open to it.

Obama’s top aides did not disagree, even though the president attacked the idea lustily last year when campaign rival John McCain proposed it. Instead, White House officials say Obama prefers his own suggestions: cuts in projected Medicare spending and tax increases on the wealthy that thus far have gained little favor among Democrats in Congress.

Several officials said the House legislation will include a government-run insurance option as well as plans offered by private companies. The government option draws near-unanimous opposition from Republicans and provokes concerns among many Democrats as well, although Obama has spoken out in favor of it.

The officials spoke on condition of anonymity, saying they did not want to pre-empt the presentation to rank-and-file Democrats on Tuesday.

Under the House Democratic plan, individuals and small businesses would be able to purchase coverage from a "health exchange" and the government would require all plans to contain a minimum benefit, these officials added. No applicant could be rejected for pre-existing conditions, nor could one be charged a higher premium, they said.

House Democrats also are considering a wide-ranging change for Medicaid that would provide a uniform benefit across all 50 states and increase payments to providers, according to several officials. Medicaid is a joint state-federal program of health coverage for the poor.

The disclosures came as the pace of activity quickened in both the House and Senate on health insurance legislation. Obama scheduled a meeting Tuesday at the White House with several Democrats.

Party leaders hope to pass legislation in both houses by early August and complete work on a compromise measure in the fall for Obama’s signature.

The president has stepped up his own involvement in the issue in recent days, and there has been a flurry of negotiations involving outside interest groups who have pledged to take steps to achieve savings within the private insurance market.

Alongside those efforts, financing Obama’s plan to spread coverage more widely carries a price tag estimated at more than $1 trillion over a decade. House Democrats are considering cutting projected Medicare payments to home health care, pharmaceutical companies, insurance companies, hospitals and others to cover costs, but not on the scale that the president proposed last winter.

The option for taxing insurance benefits is also under consideration as part of legislation taking shape across the Capitol in the Senate Finance Committee.

Numerous options are possible, many of which involve either a tax levied according to the value of an individual’s employer-provided health plan or on the benefits received by upper-income taxpayers.

The issue poses multiple potential problems for Obama, who has pledged not to raise taxes on individuals making less than $250,000 and also ran commercials criticizing McCain’s call for a tax on health benefits in last fall’s campaign.

In recent weeks, the president and his aides have sought to straddle the issue, neither accepting it nor ruling it out.

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Associated Press writer Ricardo Alonso-Zaldivar contributed to this report.

9 Responses to Democrats considering tax on health benefits

  1. Route101

    June 9, 2009 at 11:21 am

    Give me a break! The feds already tax some health expenses. Those who itemize can deduct only medical expenses, including health insurance premiums, that exceed 7.5% of their adjusted gross income (AGI). Those who claim the standard deduction pay taxes on their medical expenses regardless of their AGI. Those costs have been increasing every year in the form of higher premiums, deductibles, and copayments.

    Now Baucus and others want individuals to pay ordinary income tax on the employer’s cost (which the employer usually can deduct)?! I thought the goal was to make health care more affordable not less. What happened to not increasing taxes for people with less than $250K AGI???

  2. gazelle1929

    June 9, 2009 at 2:14 pm

    You said:

    “…The feds already tax some health expenses. Those who itemize can deduct only medical expenses, including health insurance premiums, that exceed 7.5% of their adjusted gross income (AGI). Those who claim the standard deduction pay taxes on their medical expenses regardless of their AGI. Those costs have been increasing every year in the form of higher premiums, deductibles, and copayments.”

    You may have a misconception of what is being discussed here. First, though, let’s look at what you said.

    Currently, the government allows you to reduce income for income tax purposes by deducting certain day-to-day expenses, mortgage interest and health costs being two major deductions. BUT the government says that before you can start deducting medical costs you must exclude from the deduction 7.5 percent of your income. They are not taxing health expenses; instead they are limiting how much you can deduct.

    Some years ago you used to be able to deduct interest on debts other than mortgages. Congress got rid of that deduction for two reasons: to increase revenue, but also, and perhaps more importantly in the big scheme of things, to make borrowing more expensive so people would borrow less. Didn’t work very well, but the thought was there.

    What is being discussed here is to include as income the amounts your insurance company pays out on your behalf for medical bills. If you have insurance that covers a $200,000 brain surgery, your income would be increased by that amount. From one standpoint it IS income, since someone paid something you owed for you. But in my opinion it is going to be politically impossible to pull this one off.

    Perhaps the absolute “best” they are going to be able to do is to include as income all payments made on your behalf up to the amount of premiums you paid. My guess is that that is what their real goal is. You paid $9,000 in premiums, and used $8,000 worth of service, so your effective deduction for medical expenses is going to be $1,000.

    But if you had paid $9,000 and used $200,000 your only tax “penalty” would be to have no deductions for health insurance premiums.

    You also said those who use the standard deduction pay taxes on all their medical expenses regardless of their AGI. This is exactly backwards. If people have medical expenses above the standard deduction they are going to itemize and get the tax break rather than file short form. Those who use the standard deduction get a tax break even if they have no deductible expenses. Example: I used to pay $11,000 a year in interest; now I pay less than $3,000. My total itemized deductions are several thousand less than my standard deduction, so I am getting a bit of a tax break. Also cuts down on how much I have to pay to have my taxes prepared.

  3. Baal

    June 9, 2009 at 1:21 pm

    Im NOT supporting any revisions to Health Care that requires that I pay taxes to give Health care to a NON-AMERICAN citizen or a Welfare Bum that refuses to look for work & spews out children ad nausem.!!!

  4. woody188

    June 9, 2009 at 3:23 pm

    Why don’t we take it out of the foreign aid instead?

    How about cutting Congress’s health plan to match the average citizen and putting the difference to cover the uninsured?

    Maybe the dividends from our government auto and bank ownership could cover health care expenses?

    The DOD lost $2 trillion in the last few years. Maybe we should take it from them since they can’t handle those large sums without losing huge amounts.

    There must be a better way than to force more taxes on people already over-taxed. New taxes will only exacerbate the recession. Maybe that is what they want.

    Someone should explain to Rep. Rangel that he will lose his mandate if he passes crummy legislation like this. A mandate doesn’t mean screw the people that gave you the mandate.

  5. woody188

    June 9, 2009 at 3:29 pm

    It isn’t insurance company pay outs being discussed, just the premiums paid for you by your employer. Currently these aren’t included as income but would be if Democrats succeed. Employer’s deduct these payments from their own taxes.

    Basically they are saying they will charge the middle class more for health care to provide health care for free to those that can’t afford it. But I say the middle class can’t afford health care either, seeing how even if you are insured you may have to claim bankruptcy if you have a major health crisis, so it’s a moot point.

    60% of bankruptcies are health care related.

    It would be impossible for one that makes $40,000 regularly to all of a sudden be on the hook for taxes on medical treatment in the amount of $200,000. They can try to take it from the bankruptcy lawyer.

  6. Route101

    June 9, 2009 at 5:06 pm

    You wrote:
    “They are not taxing health expenses; instead they are limiting how much you can deduct.”

    I understand the technical difference but the net effect is the same. When you increase taxable AGI you increase taxes owed (and also may trigger phaseouts of other tax benefits, or even AMT). I have not seen the proposal floating around but I gather that they are considering including in taxable income the portion of health costs (for most folks the insurance premiums) paid by the employer or former employer. If it’s the description you provide, it would be an even horribly worse scenario for the taxpayer. Would employers still be able to deduct the amounts they pay from their taxes? Maybe that’s a place to look first for additional revenues.

    As for those who take the standard deduction, they are getting an average of various possible deductions lumped together (not including the special one-time deductions such as the up to $500 of real estate taxes paid). Some, like you may benefit, or you or others might not, especially if the current proposal adds employer paid medical premiums to AGI.

    I doubt those premiums that are added to income also would qualify as additional medical expenses that can be deducted. And the increased AGI that they will cause also will decrease the amount of >7.5% AGI medical expenses that can be deducted.

    Yes, I remember when and how deductions for personal interest and also sales taxes were removed. I also remember that years ago prescriptions had their own 2% AGI deductible before they could be included in medical expenses subject to the 7.5% AGI deductible.

    You also wrote:
    “What is being discussed here is to include as income the amounts your insurance company pays out on your behalf for medical bills. If you have insurance that covers a $200,000 brain surgery, your income would be increased by that amount.”

    I’m not sure that is correct, not having read any draft legislation details; but it would be a tax nightmare, especially with the various HSAs as well as traditional health insurance plans that exist now.

    That’s an insurance company payout to providers, not the employer share of premiums. I won’t even speculate about what that proposal might do to individual AGI or to trigger various other AGI-related credits and deductions phase-outs, or even AMT. I guess we’ll have to see the details whether the amount to be included in income is the insurance company payout or the employer share of premiums.

    If you are healthy and have little or no medical expenses even with health insurance, then you still would pay more tax on the employer paid portion of the premiums which are added to your AGI.

    I don’t pay to have my taxes prepared, because I am an instructor, counselor, and technical coordinator in the AARP Tax-Aide program, certified annually to do basic, advanced, and military returns.

    I do agree with you and hope we are right that this one will be politically extremely difficult if not impossible to pull off. Maybe it’s a trial balloon aimed at getting something less in compromise. In any case, I don’t see this proposal as reducing health care costs at all – quite the opposite.

    Thanks for your comments.

  7. drich291

    June 9, 2009 at 5:30 pm

    Funny that nobody mentions the proposed decrease in Medicare reimbursements. This will surely cause more doctors and hospitals to refuse Medicare patients. All of this posturing about “choice” and they want to take it away from seniors.

    But then again, Congress would really like to implement Soylent Green. Seniors are seen as leeches and greedy geezers. Forget that they spent their life contributing in many ways to what we have in this country; just dump ‘em so we can all have more stuff.

  8. lorenbliss

    June 9, 2009 at 7:11 pm

    Once again, we see how government and governance at all levels of the United States have only one function — the propagation of capitalism (the absolute protection of the ruling class and the total subjugation of all the rest of us) — in this instance by mandatory health insurance that binds us in eternal slavery to the Sultans of Sickness: the insurance barons, the grand-dukes of the hospital-and-nursing-home realms, the prescription drug lords.

    Once again we see the only “change we can believe in” is that the ruling class grows wealthier and more powerful as we are ever more forcibly impoverished and thrust ever closer to absolute powerlessness.

    I voted for Obama, but I did so as a drowning shipwreck victim clutches at flotsam. Alas, what I hoped might save our lives has turned out to be the dorsal fin of a shark.

  9. griff

    June 9, 2009 at 8:34 pm

    What? The Democrats want to tax more and spend more? When did this come about?