The Senate Finance Committee held hearings to determine how to pay for health insurance reform, including through new taxes and tax credits.

One of the ideas floated was taxing employee health care benefits, especially for generous plans with high-earning employees. However, that idea could prove to be unpopular with many constituents. Up to now, employee health benefits have been excluded from taxes.

“To be honest, I don’t think we’re going to repeal the exclusion,” said committee chair Max Baucus, D-Mont.

Many experts agreed that the current tax treatment of health care benefits unfairly disadvantages low-income Americans and encourages Americans to use more health care dollars than are necessary, Baucus (pictured) noted. “We need to look at other tax benefits for health care,” he said in his opening remarks. “Among these are tax-preferred health accounts and the itemized deduction for health expenses. We should try to make sure that those benefits are structured fairly and efficiently. And because of the cost of comprehensive health care reform, we will need to look at other options. Among those is the president’s proposal to limit itemized deductions.”

His colleague, ranking member Charles Grassley, R-Iowa, also emphasized the need for reform. “Millions of Americans have no health insurance and millions more fear losing what they have,” he said. “Even people with insurance might be under-insured. Congress has an obligation to make insurance more available and more affordable, and still give people the option to keep what they have if they like it.”

To address those criticisms, witnesses and committee members discussed capping the exclusion on the basis of an individual’s income or the value of an individual’s benefit. Experts also discussed modifying the tax treatment of other current health tax benefits like health savings accounts and flexible savings accounts.

Joseph Antos, a scholar at the American Enterprise Institute, noted the imbalance of the tax exclusion for employer-provided health benefits. “The tax exclusion is unfair, providing tax savings to people on the basis of their employment, rather than on their need for financial help,” he said. “Individuals purchasing their own health insurance outside of their employer do not receive the tax break. Moreover, because the amount of the exclusion is not limited, it encourages firms to offer generous health plans with high premiums and minimal cost sharing.”

One way to phase in changes, he suggested, was to cap the exclusion at a high level (such as the 75th percentile of insurance premiums) and index it to general inflation, rather than medical inflation. Another approach would replace the exclusion with a standard deduction. Under both approaches, individuals buying high-cost health insurance would be required to pay a tax on the amount over the cap or standard deduction.

Dr. Michael Jacobson, executive director of the nonprofit Center for Science in the Public Interest, proposed other taxes that could be levied to promote health and help fund expanded health coverage, including taxes on beverages. He estimated that boosting the tax on distilled spirits by 50 percent and equalizing the beer and wine rates would generate $12 billion in new revenues annually. Jacobson also proposed taxing non-diet soft drinks, both carbonated and non-carbonated, to help reduce obesity. He estimated that a tax of one cent per 12-ounce can would raise about $1.5 billion per year, and a tax of one cent per ounce would raise about $17 billion per year.

Other proposals in a report released by the committee this week include a tax credit for low-income taxpayers who purchase health insurance through a government-run Health Insurance Exchange similar to the kind available in Massachusetts. The refundable tax credit would be available for individuals with modified adjusted gross income of between 100 and 400 percent of the federal poverty level.

Another proposal would provide a tax credit to some small employers for the purchase of employer-provided health insurance. The credit would be equal to 50 percent of the average total premium cost paid by the employer for coverage in the employer’s state, and would phase out for employers with more than 10 employees but not more than 25 full-time employees. Simultaneously, the credit would phase out for an employer for whom the average annual wages per employee is between $20,000 and $40,000.

Leonard Burman, director of the Urban Institute’s Tax Policy Center, recommended a value-added tax to pay for health care reform. “It is the only plausible revenue source that could pay for universal access to health insurance without very tight targeting by income,” he argued in his written testimony. “Although a VAT by itself is regressive (falls most heavily on those with lower incomes), a VAT combined with free health insurance is highly progressive.”