Republicans Target Healthcare Tax Code Reform

by Mike Godfrey, Tax-News.com, Washington

30 September 2011

During a recent speech at Stanford University’s Hoover Institution in California, Paul Ryan, the Republican Chairman of the House of Representatives Budget Committee, put forward proposals for fundamental change of direction in the current United States health care tax code.

Calling for a full repeal of what he called President Obama’s “disastrous” health care reforms, he said that structural measures are needed which would deal with the present “runaway inflation in the cost of health care.” He considered that the current debate on how to reduce the US fiscal deficit and public debt provides an opportunity to adopt a complete health care reform agenda.

With the Congressional Budget Office projecting that, due to escalating health care costs, the share of federal spending going to pay just for health care programmes will reach 45%, in Ryan’s opinion the “the solution is clear - we need to transition from the open-ended, defined-benefit approach of the past ... to market-oriented, defined-contribution reforms that promote choice and competition.”

“Our current tax code provides additional fuel for runway health care inflation,” he continued. “Under current law, employer-sponsored health insurance plans are entirely exempt from taxation, regardless of how much an individual contributes to their policy. This tilts the compensation scale toward benefits, which are tax-free, and away from higher wages, which are taxable.”

“It also,” he added, “provides ways for high-income earners to artificially reduce their taxable income by purchasing high-cost health coverage – which in turn can fuel the overuse of health services.”

He concluded that the inefficient tax treatment of employer-provided health care should be replaced with “a portable, refundable tax credit that you can take with you from job to job, allowing you to hang onto your insurance even during those tough times when a job might be hard to find.” A tax credit would allow employees to find health care insurance outside of their employer-sponsored schemes, without penalties, if that is what they would prefer, and could thereby reduce costs by increasing competition amongst health care providers.

Ryan’s proposal is, obviously, unlikely to be acceptable to the President, or other Democrats, but is probably timed to influence the deliberations of the Joint Select Committee on Deficit Reduction, which is currently looking at measures to reduce the US fiscal deficit over the next decade.

It has, however, been pointed out that a ditching of employee-sponsored health care plans and a movement towards individual policies could be expensive, at least in the short-term before competition in the market kicked in, as it is considered that employer-based schemes have greater bargaining power over costs. It could also be difficult to obtain public acceptance for such a root-and-branch change to the system at the present time.

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