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News of the Day ... In Perspective

1/26/2007

Bush proposes tax equity for health insurance

The changes proposed by President Bush in his State of the Union message would, for the first time, give workers a tax break for buying their own insurance. It would also limit the tax deduction for employer-provided insurance, encouraging the purchase of less lavish coverage.

Individual taxpayers with at least minimum catastrophic health insurance coverage could exclude $7,500 from their gross income if single, and families could exclude $15,000. Both employer and individually owned policies would qualify, and the amount would be the same regardless of the cost of the policy.

The value of employer-provided coverage would be added to taxable income. Some executive and labor union policies are worth more than $15,000, but the average employer-provided family plan runs about $11,500 per year. The deduction would be indexed for inflation. The deduction for expenses exceeding 7.5 percent of gross income would be eliminated.

The plan could mean a tax cut for 100 million working Americans and give families the opportunity to own portable coverage. It would be tax neutral to out-of-pocket versus insurance spending. It would help to correct the major distortion that the tax code creates in the medical insurance market.

The current tax subsidy, which drives Americans to over-insure and favor prepayment for medical expenses, is enormous and highly regressive. It totals more than $208 billion and is rising fast, having nearly doubled since 1996. The bulk of the tax savings goes to the most affluent: those making more than $100,000 get an average tax break of $2.780, compared with $725 for those earning between $20,000 and $30,000 (Investor’s Business Daily 1/22/07).

The Administration is also meeting with governors to determine how states could help low-income individuals who still couldn’t afford coverage, as through vouchers or refundable tax credits.

Any contribution made to a Health Savings Account would still be deductible, regardless of the $15,000 limit, but HRAs and FSAs would no longer be tax-free.

The President also said that he favors association health plans, the purchase of insurance coverage across state lines, and expansion of Health Savings Accounts.

Democrats said the plan was dead on arrival. Rep. Pete Stark (D-CA), chairman of the Ways and Means Subcommittee on Health, said his panel would not consider it.

The proposal would “shake the foundations of the nation’s health insurance system, still largely built around the workplace,” according to Democrats, labor unions, and some consumer advocates (Robin Toner and Robert Pear, New York Times 1/24/07).

“Changing the tax code is a vital and necessary step to making health care affordable for more Americans,” President Bush said.

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