Congress Looks at Tax on Health Benefits

May 27, 2009
Special Feature

A new idea floated on Capitol Hill is to tax health benefits, which are currently exempt. Employees don’t pay tax on the value of their company-sponsored health insurance and companies get to write off the cost as a business expense.

The concept of healthcare reform has received broad support from many different sides, including business leaders, labor unions, politicians, and many doctors. Now Congress is trying to figure out how to pay for it. One idea floated on Capitol Hill is to tax health benefits, which are currently exempt. Employees don’t pay tax on the value of their company-sponsored health insurance and companies get to write off the cost as a business expense, exemptions that are costing the Treasury an estimated $300 billion a year. That kind of money could help pay the estimated $1.2 trillion cost over the next decade of providing healthcare insurance for those currently uninsured.

The idea is to impose a tax on the value of health insurance policies that are above a certain level, which lawmakers say would affect mostly employees with higher incomes. The idea isn’t a slam-dunk, however. The proposal is already running into opposition from several labor unions, including the National Education Association and the American Federation of State, County and Municipal Employees, who argue that the benefit-rich policies they have negotiated for would also be affected. They also contend that union members often made salary concessions to get those benefits and that it would therefore be unfair to tax them.

A separate proposal offered by Congressional Republicans would eliminate the tax write-off for employers who provide health insurance and would replace it with a tax credit for individuals to offset the cost of their health coverage. Critics of this plan say it would destroy the system of employer-sponsored health insurance, adding that the tax credit - $2,300 for individuals and $5,700 for families, with additional subsidies for those with low incomes - falls far short of the actual cost of coverage.