The Senate Finance Committee held a hearing on incentives for providing health benefits in the Tax Code.

"Since a majority of Americans get their healthcare coverage through their employer, any changes to the current tax subsidy should be done carefully and deliberately," said committee Chairman Max Baucus (pictured), D-Mont. "We need to have a full understanding of the advantages, disadvantages and consequences."

Edward Kleinbard, chief of staff of the Joint Committee on Taxation, presented a report on tax expenditures for health care.

"The current system of providing a generous tax subsidy for employer-provided health care with no or little subsidy in the case of insurance purchased outside of the employer market distorts taxpayer and market behavior," said the report. "The existence of the subsidy reduces the price of the consumption of health care, leading to over-consumption of health care relative to other goods and services for those taxpayers with qualifying plans, and very expensive health care for taxpayers in the individual market."

MIT economics professor Jonathan Gruber told the committee about the estimated $250 billion a year that the federal government foregoes in tax revenue by excluding employer expenditures on health insurance from taxation. "This is a regressive entitlement, since higher-income families with higher tax rates get a bigger tax break," he noted. "About three-quarters of these dollars go to the top half of the income distribution."

Harvard health economics professor Katherine Baicker discussed several ways to reform the Tax Code to level the playing field. The tax exclusion for employer-sponsored insurance could be extended to all health spending, or it could be capped, so that premiums for employer-sponsored plans above a certain threshold would be taxed. The tax exclusion could also be replaced with a revenue-neutral "flat" tax deduction or credit available to anyone covered by at least a minimum insurance policy.

"Most economists would agree that our current tax treatment of health insurance is an important part of the problem, and that reforming that system would be a key component of a broader solution," she said.

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