Congressional tax reformers are taking aim at one of the most cherished tax breaks available to working Americans — employer-paid health insurance coverage.During the latest round of tax reform hearings before the Senate Finance Committee, experts in both taxation and health care presented their case for eliminating — or at least sharply reducing — the federal tax subsidies given for employer-provided health insurance, which now provide the average U.S. taxpayer with nearly $3,000 a year in benefits.

Pulling the plug on the deductibility of employer-paid health insurance would shift an estimated $246 billion from the pockets of working taxpayers to the Treasury — money that some congressional leaders believe could be used to finance a more equitable system of health care.

Finance Committee Chairman Max Baucus, D-Mont., for one, criticized the current tax breaks for employer-paid health insurance for providing too much in benefits to upper-income taxpayers.

“Almost 27 percent of these tax expenditures accrued to families with annual incomes above $100,000 — although this group accounted for only about 14 percent of the population,” he said at the start of the Senate hearing. “At the other end of the scale, only 28 percent of these tax expenditures went to families with incomes below $50,000 — although this group represented nearly 58 percent of households.”

The chairman’s concerns were underscored by a report released by the Joint Committee on Taxation during the hearing.

That report not only supported Baucus’ view of inequitable tax treatment, but also concluded that by giving workers a “discount” on their health insurance costs, employer-provided health benefits promote inappropriate overuse of health care resources.

“This ‘discount’ on the employer purchase of health insurance provides an incentive for the purchase of more generous health insurance benefits than would otherwise be purchased without the discount,” the report concluded.

The result is a distorted market for health services that wastes resources and inflates costs, the Joint Committee staff said. “The market inefficiency arising from the tax-induced spending on health care versus other goods generates a loss to the economy referred to as ‘dead weight loss,’ because it results in a net loss of consumer welfare,” report added. The “elimination of this distortion could lead the economy to function more efficiently and increase individuals’ collective welfare.”


Other witnesses at the Senate hearings also expressed concerns about the current system, under which 160 million Americans receive health insurance coverage on the job.

Harvard health economics professor Katherine Baicker told the committee, “We do not get as much value from the health care system as we should. Our current tax treatment of health insurance is an important part of the problem.”

MIT economics professor Jonathan Gruber agreed, noting that, “No health expert today would ever set up a health system with such an enormous tax subsidy to a particular form of insurance coverage.”

Significantly, however, all of the experts testifying at the Senate hearings warned that abruptly pulling the plug on tax write-offs for employer-paid health insurance benefits would create painful disruptions for American taxpayers and for the nation’s health care system.

According to Gruber, the problem with eliminating employer-sponsored insurance is that “sick and older individuals are treated much more fairly in employer groups than they will be in today’s non-group insurance market.”

Under ESI, “All individuals pay the same for insurance regardless of age or health,” he explained. “But in most states those who are sick or older must pay much more for their non-group insurance, and in many cases it is simply unavailable.” Indeed, Gruber warned, if “employer-sponsored insurance falls we could end up with a large new set of uninsured who cannot afford, or cannot obtain at any price, non-group insurance.”

For her part, Baicker suggested a series of steps that could level the playing field without eliminating employer-sponsored health insurance altogether. “The tax exclusion for employer-sponsored insurance could be extended to all health spending,” she said, noting that this “would eliminate the bias against individually purchased insurance.”

Alternatively, Baicker suggested capping tax breaks for employer-paid insurance — a move that she said would eliminate the incentive to consume excessive insurance coverage.

Still another approach would involve replacing the tax exclusion for employer-sponsored insurance with “a revenue-neutral flat tax deduction or credit available to anyone covered by at least a minimum insurance policy.”

Baucus, meanwhile, expressed concerns of his own regarding any abrupt move by Congress to short-circuit employer-subsidized health benefits.

Although he called the current system of linking health insurance to employment “unsustainable,” the Finance Committee chairman warned that transforming the current system into one in which “individuals need to purchase their own insurance and employers no longer have a role might involve too much change.”

While he didn’t specifically mention the Clinton administration’s health reform initiative of the early 1990s, Baucus made it clear that Congress is still stinging from that aborted effort.

“Washington has learned from past attempts at health care reform that too much disruption can backfire,” he said. “Too much change for those who already have health coverage can cause a backlash.”

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