Taxing Health Benefits

I was pleased to see your editorial on “Vindicating McCain ” (Mar. 21-22) exposing the “deeply cynical turnabout” between the rhetoric of the Obama campaign criticizing Sen. McCain’s health reform proposal and plans by the White House and Congress now to tax health benefits to pay for their health reform legislation.

But there is a crucial policy nuance that is incorrect in the editorial in claiming that the focus is on “the tax deduction that employers receive to offer insurance to their workers…”

Actually, the focus is on the tax exclusion that employees receive which shields from taxes the amount of compensation workers receive in the form of health insurance.  The confusion comes from the fact that there are two separate provisions in tax law shielding health insurance from taxes – one for the employer and another for the employee.  There is a separate provision in the Internal Revenue Code that allows employers to deduct health insurance as a legitimate cost of doing business.   There have not been any serious proposals in the current debate to eliminate the employer deduction for health insurance.   

Health benefits are a part of employees’ compensation packages, with the average job-based policy for a family now costing about $13,000 a year.  This is likely the most lavish expenditure that most employees make, and most don’t even know it.  Tax policy hides from them how much of their pay package is going to health insurance.  Capping this tax break would be good policy, despite the barrage of ads the American people heard during the 2008 campaign.

Grace-Marie Turner
President
Galen Institute
Alexandria, VA
(703) 299-8900
gracemarie@galen.org
www.galen.org

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I was pleased to see your editorial on “Vindicating McCain ” (Mar. 21-22) exposing the “deeply cynical turnabout” between the rhetoric of the Obama campaign criticizing Sen. McCain’s health reform proposal and plans by the White House and Congress now to tax health benefits to pay for their health reform legislation.

But there is a crucial policy nuance that is incorrect in the editorial in claiming that the focus is on “the tax deduction that employers receive to offer insurance to their workers…”

Actually, the focus is on the tax exclusion that employees receive which shields from taxes the amount of compensation workers receive in the form of health insurance.  The confusion comes from the fact that there are two separate provisions in tax law shielding health insurance from taxes – one for the employer and another for the employee.  There is a separate provision in the Internal Revenue Code that allows employers to deduct health insurance as a legitimate cost of doing business.   There have not been any serious proposals in the current debate to eliminate the employer deduction for health insurance.   

Health benefits are a part of employees’ compensation packages, with the average job-based policy for a family now costing about $13,000 a year.  This is likely the most lavish expenditure that most employees make, and most don’t even know it.  Tax policy hides from them how much of their pay package is going to health insurance.  Capping this tax break would be good policy, despite the barrage of ads the American people heard during the 2008 campaign.

Grace-Marie Turner
President
Galen Institute
Alexandria, VA
(703) 299-8900
gracemarie@galen.org
www.galen.org

SHARE THIS ARTICLE

About the author