There's a consensus building among Washington power brokers and policy wonks that may rub out several of our most cherished tax deductions in order to finance the Obama administration's health care reform plan.

The most endangered of these is the long-standing tax exclusion for employer-paid health insurance benefits - the cornerstone of the nation's present system for encouraging businesses to provide health coverage for workers.

Since World War II, this exclusion for employer-sponsored insurance has grown to become the single largest subsidy in the Tax Code. During 2007 this provision lowered taxes for American businesses by $247 billion - money that many congressional health reformers now consider essential to financing the administration's health care overhaul.

But while the ESI may be the biggest item on the health reform chopping block, it's not the only one. Others that may be on the endangered list include the popular flexible savings accounts used by workers to pay some medical bills, tax-preferred health savings accounts that provide significant deductions for self-employed individuals, and the current personal tax write-off for taxpayers whose family health expenses exceed 7.5 percent of income.

Robert Greenstein, executive director of the politically liberal Center on Budget and Policy Priorities, called on Congress to consider pulling the plug on all three during a recent Capitol Hill Roundtable Discussion hosted by the Senate Finance Committee to explore the tax changes needed to pay for President Obama's health reform.

Arguing that the deductions may no longer be needed once a stem-to-stern reform of health care is enacted, Greenstein also lashed out at what he described as the "poorly targeted" ESI. "The employer-paid health benefit tax exclusion gives the greatest benefit to those with the highest incomes, although they are the group that least needs help paying for health insurance," he told lawmakers.

Tax subsidies for employer-paid health benefits are also coming under fire from the political right.

In a separate statement at the Senate roundtable meeting, American Enterprise Institute scholar Joseph R. Antos agreed with Greenstein that the ESI is unfair, noting that it provides "tax savings to people on the basis of their employment, rather than on their need for financial help."

Instead of eliminating deductions for ESI, Antos proposed capping the amount that businesses could write off, "such as the 75th percentile of insurance premiums."

Requiring employees to pay a tax on premiums over the cap "would generate pressure from workers to their employers for less-expensive insurance options," he said. "The additional revenue collected in this way could be used to fund refundable tax credits or other subsidies to low-income persons for the purchase of insurance."

For his part, Finance Committee Chairman Max Baucus, D-Mont., nuzzled up to proposals for caps on ESI. Although he cautioned against eliminating the exclusion altogether, Baucus called the present "unlimited exclusion for employer-provided health care" a "regressive approach that often leads people to buy more health coverage than they need."


Not everyone engaged in the debate is calling for new limits on employer-sponsored health insurance, however.

On the other side of Capitol Hill, IBM senior vice president J. Randall MacDonald told the House Ways & Means Committee that instead of capping ESI benefits, lawmakers should provide new tax breaks for the uninsured. "People without access to employer-sponsored coverage should be able to have guaranteed access to private coverage and comparable tax breaks to purchase coverage on their own," he testified.

Another witness at the hearings, Economic Policy Institute health policy director Elise Gould, warned that limiting ESI write-offs could have disastrous consequences for small businesses and their employees.

"Small businesses are paying high premiums for the insurance they provide to their employees not because the plans are especially lavish, but because they have high administrative costs and include too few employees to constitute the broader risk pool that would qualify them for lower premiums," she told the House panel. "Capping the tax exclusion ... would encourage the young and healthy to opt out of these pools, and upon their exit, premiums would likely rise for those remaining."

Significantly, however, chipping away at existing tax deductions won't generate enough funds to pay the entire freight for health reform, and there has been no shortage of suggestions for additional tax law changes to pick up the slack.

Leonard Burman, director of the Urban Institute's Tax Policy Center, suggested coupling repeal of the ESI exclusion with a stiff new federal value-added tax to finance health reform.

Burman estimated that a VAT of less than 10 percent would be sufficient to pay for health care for all people who are not currently covered by government-provided health insurance.

Although Burman's Urban Institute has been no fan of consumption-based taxes in the past, he told the Senate Finance Committee that while a VAT "by itself" is regressive, when this form of tax is "combined with free health insurance [it becomes] highly progressive."

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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