Tax proposals get mixed reviews

Health insurance

State Of The Union

January 24, 2007|By M. William Salganik | M. William Salganik,SUN REPORTER

WASHINGTON -- Most Americans who have health insurance get it through their employers, in part because employers can take a tax deduction for premiums but most individuals can't.

In proposing to change that system last night, President Bush drew support from free-market thinkers who believe the link between employment and health coverage encourages people to buy more expensive coverage than they need, since employers pick up most of the tab.

Some analysts and advocacy groups, however, predicted that the plan would encourage employers to drop coverage and raise taxes for most people in the long run. They said the plan would benefit primarily the wealthy, who would pocket the biggest tax breaks, and the healthy, who can purchase individual coverage at a reasonable cost.

Michael Cannon, director of health policy studies at the libertarian Cato Institute, said the proposal fixes two of the biggest problems in the health insurance market - insurance policies that pay for unneeded or too-expensive treatments, and the unfairness of providing tax breaks for employer-purchased coverage but not individual policies.

By offering tax breaks to individuals, Bush is "almost bribing people to blow up the employer system," countered Len Nichols, director of the health policy program at the centrist New America Foundation - although the administration denies its plan is designed to crumble employer-based coverage.

Nichols said he supports decoupling employment and health insurance, but believes the plan contains "poison pills" that make it unworkable.

Here's how the plan, proposed to become effective in 2009, would work:

People who have health insurance, whether they get it through their employer or buy it on the open market, would get a tax deduction of $15,000 for a family or $7,500 for an individual, regardless of the policy's cost. But the amount that an employer contributes toward premiums would be treated as income, and would be taxed.

The administration estimates that 3 million people - of the estimated 47 million uninsured in the country - would buy coverage with the tax breaks.

By taxing employer contributions as income, the administration argues, people would select lower-cost plans to avoid a tax penalty. That would give people incentive to buy only the care they need, and would therefore drive down health spending by about 3 percent, the administration estimates.

About 80 percent of people with employer coverage would save on taxes initially, by an average of three-tenths of one percent, Katherine Baicker, of the president's Council of Economic Advisors, said in a briefing Monday.

The other 20 percent - those who currently have coverage costing more than the $15,000 deduction- would pay slightly more in taxes than they do now, according to Baicker. Other analysts said the tax penalty would hit unionized workers and government employees with the most comprehensive health coverage.

As premiums rise, however, fewer people would save taxes over time, and revenue would increase to offset early-year declines. As many as 60 percent of the insured could be paying higher taxes by the 10th year, according to an analysis by three economists at the Tax Policy Center of Urban Institute and Brookings Institution.

Some analysts quickly questioned the administration's estimates.

Ron Pollack, executive director of Families USA, a consumer advocacy group, said the projection that 3 million more people would buy insurance was "an overwhelming exaggeration." An uninsured family with income of $40,000 would get a tax break of $2,250, but to buy an average-cost policy, "you still have another $10,000 to pay, and that's a quarter of your income," he said. "To make matters worse, if it's still unaffordable, you don't get the tax deduction."

The Urban-Brookings study described the plan as "very innovative and a step in the right direction" but said the projections of tax neutrality may not hold up. There would be political pressure to increase the amount of the tax deduction over time to cover rising premiums, the economists stated.

Even some employers questioned whether people will switch to lower-cost policies. Paul Dennett, vice president for health policy at the American Benefits Council, a group representing large employers, said most members of his group already offer low-cost policies and incentives to choose them. As for tax changes accelerating that, he said, "it's not clear if that would happen in the real world."

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