Will Health Benefits Be Taxed?

There's another controversy brewing in Washington, D.C., over the administration's handling of the health care issue. The Obama administration is being accused of changing its campaign stance to consider taxing health insurance provided by employers.

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MICHELE NORRIS, host,

Back in Washington, the debate over health care continues to percolate. There's a controversy over the administration's handling of one issue in particular. It has to do with how to pay for the health-care overhaul. The Obama administration is being accused of flip-flopping on a key campaign issue: taxing health insurance provided by employers.

And to find out more about this, we turn now to NPR's Julie Rovner. Julie, let's start by defining what exactly we're talking about. How is health insurance provided by employers now taxed?

JULIE ROVNER: Well, funny you should ask. Mostly, it isn't. That means the value of health benefits that you get from your employers doesn't show up as income, so you don't pay either income taxes or payroll taxes. It's known as the tax exclusion.

NORRIS: Now, this sounds like a very good deal for anyone who has insurance provided by their employer. How did this sort of slip under the door, there?

ROVNER: Well, it's a historical accident. It actually started during World War II. There were wage and price controls, so employers couldn't give raises to people. So instead, they started giving fringe benefits, things like health insurance. And those weren't taxed. And the government allowed those not be taxed. And after the war, it just stayed in place. It didn't cost that much at the time because there wasn't that much to insure. But over the years, it has become one of the biggest tax breaks in the entire federal government.

Estimates vary, but depending on how you calculate it and what you count, the government forgoes somewhere in the neighborhood of between 175 and $250 billion a year. That's taxes that people don't pay on the value of health insurance. And, of course, the better your health insurance benefits and the higher tax bracket you're in, the bigger the tax break you get.

NORRIS: Now, I seem to remember that there have been previous attempts over the years to try to roll this back.

ROVNER: Yes, there have, indeed - either to scale it back or to take it out entirely, starting with Ronald Reagan. President George W. Bush, just a couple of years ago, tried it. And during the campaign, Senator John McCain proposed to get rid of it and replace it with a tax credit instead.

NORRIS: Which President Obama, as candidate Obama, rejected. He strongly opposed this idea.

ROVNER: Yes, he did, which made those of us who knew that if he was elected, he'd be making health care a big priority this year, kind of wince, especially when we heard things like this ad.

(Soundbite of political ad)

Unidentified Man: It's a multitrillion dollar tax hike, the largest middle-class tax increase in history.

NORRIS: Now, as someone who cover the health-care industry, when you heard this, why did that set off your alarm bells?

ROVNER: Well, because there were already Democrats even then in Congress who were quietly saying that they would need that money, or at least some of that money, to pay for this enormous undertaking. Here's how Senate Finance Committee Chairman Max Baucus put it just a couple of weeks ago at a breakfast meeting with reporters.

Senator MAX BAUCUS (Democrat, Montana; Chairman, Senate Finance Committee): I think that the tax - that tax provision should be on the table. A, it skews the system. It's regressive. And B, it's a source of revenue.

NORRIS: So Senator Baucus says this should be on the table. What does the Obama administration say?

ROVNER: Well, they're walking a very thin line. Of course, they know that the candidate said this was a terrible idea. And remember, there's nobody really speaking for the administration on health care yet. We haven't even had hearings for the new HHS secretary nominee, Kansas Governor Kathleen Sebelius.

But the closest thing we seem to have to an administration spokesman is Budget Director Peter Orszag. He was up at the Finance Committee last week, and in response to a question from Senator Ron Wyden, who asked about three things, one of them being this tax exclusion, here's what he had to say.

Mr. PETER ORSZAG (Director, Congressional Budget Office): Again, at this point, I think everything, including those three, most firmly should remain on the table.

NORRIS: Does Mr. Orszag hint that - at this idea that perhaps new troubles in the economy create new realities that the administration has to respond to?

ROVNER: I don't think so. I think it's more a matter of, they've come in saying that they want to get a bipartisan compromise. They really want to let anything that Congress wants to do - that if Congress can get a deal, they're willing to take it. They don't really care what's in it as long as there's a deal.

NORRIS: And to the extent that this is a deal for those who have health insurance, it seems like it's a tax break that favors the wealthy. Why would Democrats have a problem scaling it back?

ROVNER: Well, it does favor the wealthy, but remember, it also favors people who have very generous benefits, and among those who have very generous benefits are union members. Union members over the years have traded wage increases for extra benefits. If those start to be taxed, union members, a key Democratic constituency, will start to complain.

NORRIS: Thank you, Julie.

ROVNER: You're welcome, Michele.

NORRIS: That's NPR's Julie Rovner.

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