Will Obama Tax Employer-Provided Health Benefits?

Will Obama Tax Employer-Provided Health Benefits?

As lawmakers continue to struggle to find a way to pay for a
health reform that could cost $1 trillion or more over the next decade,
Barack Obama seems to be opening the door a little wider to an approach
he rejected soundly when John McCain proposed it during last year’s
presidential campaign: taxing the health benefits that employers provide
their workers. “This argument has evolved,” he said Wednesday at a town
meeting on health care in Annandale, Virginia. And it appears that Obama
has, too.

During the campaign, Obama had been scathing in his criticism of McCain’s
plan. One of his ads noted that the GOP nominee advocated “taxing health
benefits for the first time ever … taxing health care instead of fixing
it. We can’t afford John McCain.” But in recent days, Obama’s top aides
signaled a new openness to the idea. “There are a number of formulations
we’ll wait and see. The important thing at this point is to keep the
moving, to keep people at the table, to the keep the discussions going,”
top strategist David Axelrod said last weekend on ABC. “We’ve gotten a long
way down the road and we want to finish that journey.”

On Tuesday, Obama himself sounded almost resigned that taxing
health benefits is now front and center in the health care debate. “This is
something that’s going to be debated in the House and the Senate,” he told
the Virginia audience. “[Virginia Senator] Mark Warner is going
have to
weigh in on it. We’re all going to have to weigh in on it.” The
says he still wouldn’t go as far as McCain proposed and completely
eliminate the exclusion that now exists on taxation of employer-provided
health benefits. But Obama is now indicating a new willingness to go at least part
of the way there.
“Nobody at this point is — or not many folks — are talking about
benefits or completely eliminating the exclusion,” Obama said. But he noted
that taxing benefits above a certain point — citing, as an example,
year — would have some benefits in holding down costs overall. “If you
some Cadillac plan that costs $17,000, then what we’re going to do [under this scenario] is you’re going to have to pay taxes on that last $4,000,”
Obama said. “And the idea that is being debated in Congress right now is,
is that a good way to ensure that people don’t have these big Cadillac
but instead have more sensible plans.” Read “The Year in Medicine 2008: From A to Z.”

The major reason lawmakers are considering taxing these benefits for the
first time: there’s a lot of money involved. Depending on how it is
structured, a tax on the most expensive benefits could bring in hundreds of
billions of dollars over the next 10 years, the Congressional Budget Office
has estimated. But it would be a politically treacherous move that would
affect only the wealthy. Many of those generous health plans are also part
of union contracts — and in many cases, were negotiated in lieu of
wages — which means Obama might have to go back on his campaign promise
raise taxes on those earning less than $250,000 a year.

Another complication is that the average cost of employer-provided plans
varies widely across the country. In 2006, for example, the average
employer-provided plan for a family in New Hampshire cost $12,686; in
Hawaii, the average was only $9,426, according to statistics compiled by
Kaiser Family Foundation. So it is no surprise that lawmakers from states
where health coverage is more expensive are wary of the idea. A way around
that problem, says Massachusetts Institute of Technology economics
Jonathan Gruber, would be to have the taxes kick in at different levels in
different states. “Otherwise,” he says, “you would be putting too much
pressure on New York, and not enough on Mississippi.”

See TIME’s Pictures of the Week.