Obama Is Pressed to Tax Health Benefits
Seeking GOP Votes, Democrats Split Over Plan for New Levy
By Lori Montgomery and Ceci Connolly, Staff Writers
Monday, June 15, 2009
The White House is caught in a battle within its own party over
how to finance a comprehensive overhaul of America's health-care
system, as key Democrats advocate a tax plan that could require
President Obama to break his campaign pledge not to raise taxes
on the middle class.
Sensitive to voter anxiety about a soaring federal deficit,
Obama and congressional leaders have vowed to pay for a sweeping
expansion of the health-care system -- expected to cost more
than $1 trillion over the next decade -- without additional
Much of the money is likely to come from reining in spending on
federal health programs for the elderly and the poor. Obama has
proposed trimming more than $600 billion from Medicare and
Medicaid by 2019 -- including more than $300 billion in cuts
unveiled in his Saturday radio and Internet address -- which
could fulfill the promise to curb the growth of federal health
The rest of the cash will probably come from new taxes. But
Democrats are deeply divided over which taxes to raise, and the
issue has become a central stumbling block in the push to enact
legislation by fall.
In recent days, Obama has revived a tax plan he first offered in
February: limiting itemized deductions for the nation's 3
million highest earners. Polls show that the idea is popular --
it was Obama's biggest applause line last week at an event in
-- and it would enable him to abide by a campaign pledge to pay
for coverage for the uninsured with new taxes on the rich.
"He believes this is the most equitable way to do this," said
senior White House strategist David Axelrod. "It places the
burden on people who can most afford it."
But many Democrats, particularly in the Senate, have balked at
the idea, saying they prefer a tax that has some hope of winning
Republican support. In legislation that could be unveiled as
early as this week, Senate Finance Committee Chairman Max Baucus
(D-Mont.) is expected to propose a new tax on the health
benefits that millions of Americans currently receive tax-free
Economists say taxing employer-sponsored benefits would help
trim runaway health costs and force society to broadly share the
burdens of reform. The idea also has bipartisan appeal. Former
president George W. Bush and Sen. John McCain (Ariz.),
the 2008 GOP presidential candidate, championed a form of the
tax; so did Obama advisers Jason Furman and Ezekiel Emanuel
before they joined the administration.
"The Democrats are trying to figure out whether they can do
health-care reform by themselves without Republicans, or whether
they need to adopt some Republican ideas to get a health-care
plan," said Chris Edwards, director of tax policy at the
libertarian Cato Institute. Taxing health benefits "could be the
center of a bipartisan agreement," he said.
But political analysts say the idea is treacherous, especially
for Obama. Baucus is considering a tax on employer-sponsored
premiums in excess of $15,000 a year, Senate aides said, a plan
that would strike many of the very families Obama has vowed to
protect from a tax increase. Yesterday, top administration
officials pushed back forcefully against the tax, which Obama
criticized during the campaign.
"The president starts with the premise that 180 million
Americans have health coverage through their employer, that
attacks on those benefits may dismantle that marketplace,"
Health and Human Services Secretary Kathleen Sebelius said on
Two-thirds of Americans under age 65 get coverage through an
employer -- more than 158 million people, according to the
Kaiser Family Foundation. In 2008, only about one in five
employer-sponsored plans carried the high premiums likely to be
hit by the tax.
But research shows that those people tend not to be wealthy
highfliers with gold-plated insurance plans, as advocates
assert, but those who have to pay high premiums just for basic
coverage -- the old, the sick, women of childbearing age and
residents of high-cost urban areas. Elise Gould, director of
health policy research at the liberal Economic Policy Institute,
found that a similar cap suggested by a 2005 tax reform panel
would have raised taxes mainly on workers with family coverage,
many of them in smaller firms with high concentrations of older,
female or unionized workers.
Labor leaders, who have for years chosen better health benefits
over higher wages in contract negotiations, call the tax a
deal-killer. "It has the capacity to really undermine trust in a
basic kind of way," said Gerald Shea, assistant to the president
of the AFL-CIO. "If you say you really, really want to help out
the middle class, what are you doing charging more for the
health care that's already costing us an arm and a leg?"
It could also prove poisonous in the 2010 elections. In a recent
survey for Health Care for America Now, a labor-backed reform
advocacy group, Democratic pollster
Celinda Lake found that 80 percent opposed a tax
on benefits, compared with 63 percent support for limiting
itemized deductions for high earners.
"Taxing benefits would be a disaster," Lake
said. "You have no idea how strongly this is going to backfire
if we do it."
Key lawmakers in the House don't particularly like either of the
competing tax plans and may yet offer a third proposal. But in
the Senate, the more important congressional battleground,
taxing health premiums "has reached the level of a foregone
conclusion," said Len Nichols, a health policy analyst at the
nonpartisan New America Foundation.
Politics aside, the tax dwarfs all other current proposals as a
potential cash cow. The tax-free treatment of employer-provided
health insurance is the biggest loophole in the tax code and the
second-largest federal health-care cost, after Medicare. Taxing
half of all employer-sponsored premiums would generate nearly
$1.2 trillion over the next decade, according to the nonpartisan
Joint Committee on Taxation, compared with about $270 billion
for new limits on itemized deductions for the rich.
Advocates say taxing benefits also makes good economic sense.
The rewards of the current tax break fall heavily to the
wealthy, and there is no similar tax break for workers who must
buy insurance on their own. Many economists also dislike it
because it encourages workers to take compensation in the form
of health care instead of higher wages, pushing resources into
the health system and increasing costs.
"Even in the absence of wanting the money, you'd want to do it,"
said MIT economist Jonathan Gruber.
Senate Democrats have been considering two options. The first
would be to tax premiums above a certain level, such as the
value of the standard family plan offered to federal employees,
which will be about $15,000 in 2013, Senate aides said. That
would raise about $420 billion over 10 years. The other option
would be to apply the cap only to families earning more than
$200,000 a year ($100,000 for individuals), which would raise
about $160 billion over 10 years.
A senior Baucus aide said the committee is leaning toward the
former option, which would do more to "bend the curve" of
soaring health costs.
In either case, workers would see any insurance premiums in
excess of the cap added to their wages and taxed as income. That
could increase their tax bills by hundreds or thousands of
dollars a year, said Paul Fronstin, director of health research
at the nonprofit Employee Benefit Research Institute.
The Baucus aide stressed that the goal of reform is to lower
premiums for everyone. But the White House is clearly not
"There is still a great deal of disagreement," Sebelius said,
"on whether or not taxing benefits at any level of any kind
really does put us a step forward or take us a step back."
Polling analyst Jennifer Agiesta contributed to this report.