Will Health Care Reform Tax Benefits?

President Obama wants to overhaul health care reform in the U.S. to aid the 46 million Americans who are currently uninsured. But his plan needs major funding. Some argue that one of the ways to pay for the proposed reform is to tax health care benefits. NPR health policy correspondent Julie Rovner explains what the president's proposal could mean for consumers.

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MICHEL MARTIN, host:

Now, one thing women and men, macho or otherwise, seem to agree on these days is the need to overhaul this country's health care system. Well, there's obviously broad disagreement on what kinds of reforms work best. The Obama administration has signaled a willingness to tax some employee health benefits to help pay for overhauling the health care system generally.

Our regular contributor on matters of the economy and personal finance, Alvin Hall, is still away. So we've called Julie Rovner, NPR's health policy correspondent, and she's with us on the phone. Julie, thank you so much for joining us.

JULIE ROVNER: Good morning.

MARTIN: So Julie, first of all, if you'd set the table for us - for folks who don't cover this all the time - is there a broad-based health-care overhaul proposal being circulated right now?

ROVNER: Well, there are several. People are now not only going to have to learn about how the health system works, they're going to have to go back to their - brush up their high-school civics. We have actually five different committees in the House and Senate, three in the House and two in the Senate, that are working on this. But of those five committees, only two of them get to decide how to raise the money to pay for this.

Now, if you'll recall, everybody has agreed that this will not add to the deficit. So it's going to cost some money to expand coverage and to help people pay to have coverage. Certainly people with low incomes can't afford the, you know, 10 or 12 thousand dollars that it costs to buy a health care policy. So they're going to have to come up with ways to help subsidize those people, and indeed, you know, one of those ways is perhaps by taxing the health benefits of people who get their health care on the job.

Now, there's only two committees that get to help raise that money, the Ways and Means Committee in the House, and the Finance Committee in the Senate. Of the bills that are now circulating around, neither of those committees has shown us any proposals for paying for them yet.

So even though people are talking about maybe taxing benefits, nobody's actually put it officially on the table, and the president, who campaigned very vigorously against this when he was a candidate, has hinted that, well, if Congress insists that this is one of the ways they might want to raise the money for it, then maybe he would go along with it, but he hasn't come out and said that he wants to do this.

MARTIN: And why is this an attractive idea, given that there is clearly a lot of political risk involved in advancing it? Why is this an attractive idea?

ROVNER: Well, everybody quotes, you know, Willie Sutton. It's where the money is. Right now, if you get your health insurance from your employer, you do not pay tax on the value of that. This dates back all the way to World War II, when there was basically wages and wage freezes, but the government said if you want to give fringe benefits to your workers, then they wouldn't have to pay taxes on it. And so that was a way to attract workers without being able to give them raises.

So employers started to give people - it was basically hospital insurance at the time. This was the rise of Blue Cross plans, and it wasn't very expensive. There wasn't that much to insure. Hospital care wasn't that - you know, wasn't so expensive, but it was a nice little fringe benefit. And that's essentially how we got the system that we have now, was that employers gave their workers hospital coverage, later doctor coverage, much later drug coverage.

That's how we got the rise of employer-provided insurance, and by tradition it basically wasn't taxed. Well, over the years that's come to be extremely valuable. It is now - the taxes foregone on that health insurance is now the second-largest government expenditure in health care after Medicare. It's an enormous amount of money. It's about $280 billion a year in taxes that the government doesn't collect.

So if you were to start taxing even a small portion of it, that's a lot of money. That's why everybody's looking at it. It's just too big a piggy bank to let go when you're trying to find a way to finance a health care system.

It's also unfair in a lot of ways. If you get your health insurance on the job, you don't pay taxes on it, but if you work for an employer who doesn't provide health insurance, and you go out and buy your own, you don't get any tax breaks. How is that fair?

So there's an inherent inequity there, and a lot of people have been talking about that for a lot of years. So economists say there's no reason not to go after it because it's so unfair. On the other hand, if you look at union workers who said, look, for years we have given up wage increases to get more generous health benefits, so now you're going to come back and say we're going to tax those - well, we've given up things over the years, so don't do that. And of course, you know, unions are an important part of the Democratic base. But there's a lot of political danger in doing it.

MARTIN: So it's just too large a potential pool to ignore. So Julie, in a minute and a half that we have left, you'd mentioned just how complicated it is and how we have to kind of refresh our civics lessons in order to follow this thing, and thankfully we have you to do that for us. So what are some of the next things we should be looking for in this important debate?

We do expect to hear from the president today. He's going to be speaking with reporters today, but what are some of the other things we should expect to look for as this debate moves forward?

ROVNER: Well, I think soon - you know, we're starting to see some of the details on how Congress would like to put together the package of how to expand the health system, how to save money, how to do, you know, cost containment, how to change some of the incentives around in the health system, how to put together these exchanges where people would be able to choose different kinds of plans.

What we've not really seen on the table yet is how they would pay for it, and that's the next step. We probably won't see that until after the Fourth of July recess. That's where the political rubber really meets the road. That's going to be the really, really dicey stuff, and that's what you look for, and that's where this - will they try to tax - and it won't be the whole thing, but will they try to tax a portion of employer-provided health benefits? And that's really what we're going to be looking for, when we start to see those financing packages.

And we expect to see other things. Maybe they'll put - increase the taxes on alcohol. Maybe they'll try to put a tax on sugared soft drinks. It's when we see those financing packages that you'll look for this, and that's what we'll be looking for in about two weeks.

NPR health policy correspondent Julie Rovner joined us on the phone. Julie, thank you so much.

ROVNER: You're so welcome.

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