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Afternoon Wonkery: Baucus and the employer tax exclusion |
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As DemFromCT pointed out yesterday, the white paper Senator Max Baucus released yesterday leaves open the option of altering the current employer-based health care tax exclusion.
At first blush, altering or eliminating the employer-based tax exclusion sounds exactly like what Senator John McCain wanted to do, and exactly what we’ve been arguing against for months. So why is it ok when Baucus does it?
Igor Volsky over at Think Progress’ Wonk Room explains:
So what’s the difference? Why aren’t progressives jumping down Baucus’ throat and accusing him of treason? While McCain proposed replacing the employee deduction with a one-size-fits-all tax credit without reforming the health insurance market, Baucus pairs employee-tax tweaks with market reforms that would increase access to group coverage.
It’s a key difference. Let me elaborate.
The current employer-based health care exclusion says that unlike some other employee benefits - which are taxed just like cash - any money your employer spends on your health care isn’t taxed. So, for example, if your employer spends $100 every month paying for your health care plan that you get through work, that money is never taxed. If you had to buy health care yourself, you’d have to spend $100/month of your post-tax income on health insurance, which is more expensive. Not taxing the health benefits you get through work encourages employers to offer health insurance. Their money goes farther because it is not taxed and employees have to spend less. It’s a win-win.
There’s a problem, though, and it’s that the tax exclusion is a regressive tax - it benefits the rich more than it does the poor. The rich pay a higher tax rate on their income than the middle and lower classes, but they get their health insurance through their employer tax free just like everyone else. So, $100 in tax-free benefits is worth more to the rich because at their higher tax rate, that $100 turns into much less if you convert it to post-tax money.
The problem with John McCain’s proposal, at least where it concerns the tax exclusion, was two-fold. First, it eliminated the tax exclusion and thus eliminated the incentive for employers to provide health insurance. Second, it provided a woefully inadequate, one-size-fits-all alternative - a $2,500 tax credit for everyone - that would fail to cover most people as they bought insurance on their own. In Baucus’s vision, these problems are solved. Again, Igor Volsky explains:
Baucus proposes two changes to the tax exclusion: capping the amount of health care premiums that can be excluded from employee wages and restructuring the exclusion on a sliding scale based on income, giving people with lower wages a larger deduction. But, since the plan simultaneously expands Medicaid, Medicare and SCHIP, creates an insurance exchange, allows Americans to buy into a new public plan, and ends discrimination against individuals with pre-existing conditions, the restructuring of the tax exclusion would not leave Americans without coverage.
So, the tax exclusion would be restructured so it benefits the poor more than the rich - a goal for all progressive taxation plans - and a robust alternative would be offered - a public plan that everybody could buy in to with premiums subsidized according to income.
The only similarity Baucus’s plan has to McCain’s is in the terminology. In reality, Senator Baucus revamps a regressive tax into a progressive one and provides a great alternative to those who don’t get or don’t want to get health coverage through work. John McCain and other conservatives would eliminate the tax incentive altogether and throw you out on your own without consumer protections with nothing but a paltry one-size-fits-all tax credit for comfort.
(also posted at the NOW! blog)
