Tax Cap

While we have no confirmation at all from the White House, news reports are circulating that President Bush is considering bold changes to tax policy impacting health insurance.

Hooray! There are several valuable proposals that would make it easier for people to buy coverage, such as making health insurance tax deductible whether you buy a policy yourself or get it at work.

But the gutsiest idea, and one that would win the biggest cheers from the policy community and from economists around the country, is to limit the generous tax break for gold-plated, job-based policies and then use the revenue to help the uninsured buy coverage.

The “tax cap” was one of the key recommendations that the president’s Tax Reform Panel made in its 2005 report. Earlier that year, 59 policy experts representing more than 49 organizations, primarily non-profit public policy research organizations, submitted a statement to the panel advocating a cap.

We said that the double tax break for employment-based health insurance – deductible for the employer and excluded from income for the employee – drives many of the distortions in the health sector today.

But capping the tax break wouldn’t mean the end of employment-based health insurance as we know it.

Companies would still offer health insurance, and the full value of the policy would still be deductible for the employer. But if the health insurance policy an employee gets at work were worth more than, say, $11,500 a year for a family, then anything above that amount would be considered part of the worker’s taxable income ($11,500 was the amount of the cap recommended by the tax commission and is the current value of the average job-based family policy).

For example, a worker with a $12,000 policy would pay taxes on the extra $500 – equal to about $165 a year in added federal income taxes for a worker in the highest bracket.

To repeat:

Employers would still be able to deduct the full cost of health insurance because benefits and cash wages both are employee compensation and therefore are legitimate business expenses. But employees would not receive tax exemption for an unlimited amount of health insurance.

Why is this so crucial? Our joint statement explains some of the distortions the current system creates:

  • The exclusion undermines cost consciousness by hiding the true cost of health insurance and medical care from employees, and it makes health care seem less expensive than it really is since taxpayers are footing part of the bill.

  • Because the full cost of health insurance is not visible to employees, the exclusion artificially supports increased demand for more costly insurance that covers more medical services – even services that may provide little value in improving a patient’s health. The tax system therefore promotes inefficiency in our health care delivery system and keeps people from seeking insurance that affords better value.

  • By promoting health insurance over wages, the exclusion suppresses cash wages.

  • Tying the tax break to the workplace means many employees have little choice and control over their health insurance and their access to medical services.

  • The tax benefits are skewed to favor higher-income individuals and those who demand the most expensive health coverage and medical treatments.

  • The self-employed, the unemployed, and those whose employers do not offer health insurance are discriminated against because they receive much less assistance, if any at all, when they purchase health insurance. As a result, those with equal levels of total compensation are taxed unequally.

Many of our friends in the employer community do not like this idea at all. But failing to address this distortion is leading to many of the other so-called solutions that they like even less – especially a mandate that employers must provide and pay for health insurance that the government defines.

I am convinced that the tax cap would provide a new negotiating tool so employers and employees could become partners rather than adversaries in figuring out how to stay under the cap and seek better quality, better outcomes, better service, and better prices in health care.

A tax cap isn’t the end all and be all of health policy. But it is a huge step in the right direction to give both employers and employees better incentives.

And the amount recouped from people who don’t change their behavior and who still get expensive policies at work (such as highly paid lawyers, corporate executives, and members of Congress) could generate resources to help the uninsured.

This would be a courageous stand, but we will surely hear criticism that “they’re going to tax your health benefits.” But that need not be so if people make smarter decisions and respond to incentives to bargain for more affordable health insurance – which also frees up more of their pay for other needs.

And isn’t moderating the escalation of health costs the goal? This would help even more.

As I explained in a talk to the American Benefits Council in 2005:

  • There would be some relief in sight for employers, giving them and their employees an incentive to bargain for better value.
  • Employers would be more likely to stay in the game if the open-ended tax preference were limited and they could gain a new tool to control costs.
  • And the uninsured would benefit from new revenue for tax credits to help them purchase coverage.

We think this is important enough that we actually produced a book about it called Empowering Health Care Consumers through Tax Reform.

A tax cap would be the right thing to do.

Grace-Marie Turner


  • The wrong prescription
  • Is ‘quick’ enough?
  • Diverse groups search for health care answer
  • Rethinking health insurance
  • Technical explanation of H.R. 6408, the “Tax Relief and Health Care Act of 2006”

Source: The Washington Post, 01/13/07

The Washington Post called House legislation to require the government to negotiate Medicare drug prices “misguided.” In an editorial published the day after the House voted 255 to 170 to approve the measure, the Post said that the Department of Veterans Affairs is a poor model for how to get low prescription drug prices. “Fully 3,000 of the 4,300 medicines covered by Medicare are unavailable under the veterans’ program. Restricting the list of covered drugs saves money, but it also reduces the quality of the benefit — 1.5 million veterans are sufficiently unhappy with the result that they opt to buy the more inclusive Medicare coverage.” The Post concludes that “government fiat” is not the answer, and allowing competition among insurers is the better course.
Full text:

National Review editor Rich Lowry argues that Medicare Part D’s “unexpected success” is due in large part to the absence of government interference in drug price negotiations. “As it happens, government negotiations of prices won’t do any good unless the government is empowered not to offer certain drugs, thus achieving real bargaining power,” writes Lowry. But this tactic will not only deny choice, it will also “obstruct medical progress, to the detriment of seniors and all of us.”
Full text:

Author: Kevin Freking
Source: Houston Chronicle, 01/18/07

“Groups representing doctors, retirees, business executives and others united behind a plan on Thursday to reduce the number of uninsured Americans through tax breaks and an expansion of some existing government programs,” the AP reports. The groups, which have been working for nearly two years, include the U.S. Chamber of Commerce, the American Medical Association, and the AARP. “Their first priority is to focus on children.” The coalition “envisions a ‘one-stop shopping’ center that would let uninsured children be automatically enrolled in the State Children’s Health Insurance Program when they enroll in other means-tested programs such as discount school lunches and food stamps,” AP reports. “The initiative, which the groups labeled as Kids First, also creates a new tax credit designed to make it easier for families with incomes below 300 percent of poverty to pay for insurance for both children and adults.”
Full text:
For the full text of the Coalition Report:

The Kaiser Commission on Medicaid and the Uninsured has published a new group of publications that examines trends in access to Medicaid and the State Children’s Health Insurance Program (SCHIP). The package includes an update on enrollment procedures, eligibility rules, and cost-sharing practices in Medicaid and SCHIP in the 50 states in 2006.
Full text:

Source: Cato Unbound, 01/08/07

Cato Unbound is a monthly “virtual trading floor” from the Cato Institute featuring essays and responses from the world’s leading thinkers. This month’s lead essay is by economist and author Arnold Kling, who argues “that the American health system does not insure citizens against the risk of ill health so much as ‘insulate’ them from the true cost of medical procedures, encouraging often needless procedures, and putting upward pressure on the costs of care.” Respondents include health care consultant Matthew Holt, Duke University Professor Clark C. Havighurst, and Jonathan Cohn, senior editor of the New Republic, with some conclusions that universal, government-directed health care is inevitable in the U.S.
Full text:

Source: Joint Committee on Taxation, 12/07/06

Legislation passed in December as part of the Tax Relief and Health Care Act of 2006 provides new opportunities to enhance Health Savings Accounts. The House Joint Committee on Taxation has published a technical explanation detailing the provisions related to HSAs. See pages 71-80 of the report.
Full text (pdf):

The Department of Treasury also published a news release with a good summary that helps consumers make sense of the new legislation.
Full text:


Can Government Price Negotiation Work for the Medicare Drug Benefit?
American Enterprise Institute Event
Friday, January 19, 2007, 2:00 p.m. – 4:00 p.m.
Washington, DC

For additional details and registration information, go to:

Grace-Marie Turner speaking on the Small Business Advocate Show
Regional Radio Broadcast
Tuesday, January 23, 2007, 7:00 a.m. – 7:30 a.m. ET

For additional details, go to:

America’s Health Care System is Sick – How to Cure it
Pacific Research Institute Event
Wednesday, January 24, 2007, Noon – 1:15 p.m.
San Francisco, CA

For additional details and registration information, go to:

Third Annual Health Savings Account Summit
Financial Research Associates Event
January 24 – 25, 2007
Las Vegas, NV

Grace-Marie Turner will moderate a panel on “Case Studies in Transparency: Obstacles, Opportunities and Results” on January 24. For additional details and registration information, go to:

Engaging the Consumer to Deliver on the Promise of HSAs
DST Health Solutions Audio Conference
Wednesday, January 24, 2007, 1:00 p.m. – 2:00 p.m. ET

For additional details and registration information, go to:

Health Information Technology and Rapid Learning
Burness Communications Health Affairs Briefing
Friday, January 26, 2007, 9:30 a.m. – 11:00 a.m.
Washington, DC

For additional details and registration information, go to:

Health Policy Matters is a weekly newsletter containing summaries of timely and informative studies and articles on free-market health reform. It features research and writings by participants in the Health Policy Consensus Group, articles of interest from the health policy world, and announcements of coming events. Health Policy Matters is published by the Galen Institute, a not-for-profit public policy organization specializing in information and education on health policy. For more information about the newsletter and our organization, please visit our website at

If you wish to subscribe to this free weekly newsletter, update your address, or be removed from our list, please send an e-mail message to

The views expressed in this newsletter are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.