Baucus Calls For Healthcare Tax Reform

by Mike Godfrey, Tax-News.com, Washington

01 August 2008

Senate Finance Committee Chairman Max Baucus (D - Mont.) has called for an overhaul of the US tax code with regards the way it treats the provision of healthcare, arguing that current rules give the wealthy an unfair tax deduction.

At a Finance Committee hearing to discuss health benefits in the tax code on Thursday, Baucus argued that the system as it stands is "unsustainable" and stressed the need for carefully thought through reforms, especially in the area of tax subsidies for healthcare which, he noted, "stand at the intersection of healthcare and tax reform."

"The tax code includes many provisions that affect health care — FSAs, HSAs, the TAA health care tax credit, and the deduction for medical expenses in excess of seven and a half percent of AGI — a virtual alphabet soup of provisions. But the tax subsidy most relevant to today’s hearing is the provision that one of our witnesses has called “the third largest government entitlement for health care.” That is, the exclusion of employer-sponsored health benefits from individual taxation," Baucus told the committee.

According to the Montana Democrat, 160 million Americans, or three-fifths of the non-Medicare population, receive health benefits through the workplace. However, the tax code does not count the cost of this health insurance coverage as income, and as a result the federal government receives USD200bn less revenue every year.

"Economists have long recognized that the tax exclusion for health benefits is regressive," argued Baucus. "In 2004, nearly 27% of these tax expenditures accrued to families with annual incomes above USD100,000 - although this group accounted for only about 14% of the population."

Meanwhile, at the other end of the scale, only 28% of these tax expenditures went to families with incomes below USD50,000 - although this group represented nearly 58% of households, Baucus observed.

"Not only do higher income families receive more benefit due to their marginal tax rate - but they are also more likely to receive healthcare benefits from their employer. Economists also tell us that the tax treatment of employer-sponsored health benefits creates an incentive for over-insurance. And they tell us that this incentive, in turn, promotes healthcare cost inflation," he said.

While some have proposed transforming the current system into a system where individuals need to purchase their own insurance and employers no longer have a role, Baucus cautioned that this might be too radical a step to take.

"All of us here recognize that our system is unsustainable. We cannot continue on our current path. But we must strike a balance. We need to fix what’s broken, without breaking what’s working," he remarked.

"Let us consider ways to change the system as much as appropriate, but not more so. And let us try to find a happy ending for our several stories, not yet completed," Baucus concluded.

Recommended