President to Propose Standard Health Care Deduction

NEWS-FEDERAL, 2007TAXDAY, (Jan. 23, 2007)- For the first time since taking office, President Bush plans to propose a targeted tax increase aimed at insured workers who are covered by high-cost health plans provided by their employers. The president’s plan would establish a standard deduction for the purchase of health insurance. Under the president’s plan, families who purchase health insurance would qualify for an automatic, above-the-line deduction of $15,000. Individuals purchasing single policies would not pay income or payroll taxes on the first $7,500 in compensation.

The plan aims to provide a level playing field for those who are insured by their employers and those who purchase health care insurance themselves, noted Katherine Baicker from the White House Council of Economic Advisers at a press briefing on January 22

Bush plans to unveil the standard health care deduction proposal in his State of the Union address to a joint session of Congress on January 23. The president first made reference to the proposal in a radio address on January 20. Bush described the new proposal as a “tax reform designed to help make basic private health insurance more affordable —whether you get it through your job or on your own.”

The president contended that the current tax code “unfairly penalizes people who do not get health insurance through their job ... (and) unwisely encourages workers to choose overly expensive, gold-plated plans.” Workers who receive these costly health insurance plans through their employers would be taxed on the cost of the benefit above the proposed threshold for the tax break. That means, for example, an employee taking a $7,500 health care standard deduction and covered by an $8,500 health plan, must pay taxes on the $1,000 difference.

On the other hand, the proposal could make health care coverage affordable for many uninsured taxpayers who take advantage of the standard deduction. For example, a family earning $60,000 in the 15-percent income tax bracket and 15-precent payroll tax bracket, currently would pay an estimated $5,200 for coverage, noted Baicker.

Under the president’s plan, the same family would be eligible for a $15,000 standard deduction. Assuming a 30-percent marginal tax rate, the family would have $4,500 to put toward a health plan. “That’s a huge chunk of the cost of an insurance policy out there so it makes insurance much more affordable for those people,” Baicker asserted.

There are currently an estimated 30 million employer-provided policies that exceed the cost threshold, noted the officials. Unless an insured worker chooses a compensation package with health care plan costs below the amount of the health care standard deduction, the employee would be taxed on the difference, starting in 2009 under the plan. Because the proposed deduction would not take effect until 2009, insured workers with generous plans would have two years to change the mix of their compensation package to avoid taxation, noted Baicker. In addition, the standard deduction would be adjusted for inflation in future years.

The number of Health Savings Accounts is expected to grow under the president’s health care deduction plan since the proposal is biased toward the purchase of lower premium, high-deductible plans and HSAs are paired with high-deductible health insurance, acknowledged Baicker.

The cost of the proposal over ten years is revenue-neutral. The first five years are expected to be revenue-losers but those costs are expected to be offset in the next five years, according to Baicker.

Those who cannot afford private insurance due to pre-existing medical conditions or income levels that are too high to qualify for Medicaid benefits could benefit from another proposal called the “Affordable Choices Initiative,” noted Special Assistant to the President for Economic Policy Julie Goon. This proposal would redirect certain federal heath care funding that could be more effectively spent by states in helping the poor and hard-to-insure access affordable private insurance, according to Goon.

Democrats' Reaction

Senate Democrat leaders on January 22 harshly criticized President Bush’s proposal to create a standard deduction for health insurance, saying it is tantamount to a tax increase for the middle-class. Democrat leadership also charged that the proposal would encourage the uninsured to purchase health coverage on their own. Moreover, they cited studies that found that roughly 90 percent of applicants in what is known as less-than-perfect health were unable to buy individual policies at standard rates, while 37 percent were rejected outright.

“Individual health insurers may deny you coverage based on your medical history or put you in such a high-risk category that it makes health coverage too expensive,” according to Karen Pollitz, a Georgetown University researcher who co-authored a 2001 study on the individual health-insurance market for the Kaiser Family Foundation.

Democrats likened the health care deduction to the president’s health savings account (HAS) proposal in his 2006 State of the Union address. Again, Democrats cited a study that downplayed the benefit of HSAs. The Employee Benefit Research Institute found significant levels of dissatisfaction among people covered by the high-deductible, HSA style plans —also known as consumer-driven health plans (CDHP) —that form the basis of Bush’s health care proposal.

House Democrat leaders said that they had hoped President Bush would offer bipartisan solutions to the nation’s problems. Majority Leader Steny Hoyer, D-Md., said Bush must go beyond words and demonstrate his willingness to deal with energy independence and global warming. House Majority Whip James Clyburn, D-S.C., called on the president to come to the Capitol prepared to debate, rather than dictate the road ahead.

“The President reportedly has repackaged his tax break gift for America's wealthiest, only this time it's wrapped up to look like a break on health care costs,” said House Energy and Commerce Chairman John Dingell, D-Mich. “We need to get health care coverage to Americans who need it; not give more tax breaks to the wealthiest.”

Democrats said they would prefer to expand successful programs like the State Children's Health Insurance Program or fully fund the historic No Child Left Behind education law. “I would like to hear him address the need for fairness in our economic policy where economic growth benefits everyone and not just a few,” said House Financial Services Committee Chairman Barney Frank, D-Mass.