Why Tax Health Benefits? Unanswered Questions, Unspoken Assumptions

July 21, 2009

In a guest post at Jon Cohn’s blog The Treatment, Professor Harold Pollack makes a heartfelt case for allowing some taxation of employer health benefits.  “Don’t take the (tax) exclusion off the table,” he tells Democrats.  As Prof. Pollack rightly says, there’s a heated debate among Dems about the possibility of taxing some health benefits in order to offset some costs (and some political resistance) to health reform.

“There’s no bad guy in this fight,” says Prof. Pollack.  “Democrats must raise more than $1 trillion over ten years to pay for health reform.”  The $1 trillion figure is debatable, especially since we don’t know the final shape of health reform, but the “no bad guys” comment is reasonable enough.  And as he points out, there is some discussion of limiting new taxes to higher earners (e.g. $100,000 for individuals and $200,000 for families).

Taxing health benefits got a big shout-out last week from Douglas Elmendorf at the CBO, too.  They may not be bad guys, but advocates for this form of taxation still haven’t answered a fundamental question:  Why use this form of taxation? Why – politics aside – does it make sense to start taxing health benefits?  Health benefits are a relatively small part of overall earnings in America, and the decision to exempt them from taxation was an acknowledgment that we – alone among industrialized nations – don’t provide government health coverage.

Taxation is used for two basic reasons:  To raise revenue,  and to change behavior in a socially productive way.  We tax liquor and cigarettes to discourage consumption, for example.  Early advocates of taxing health benefits used logic and assumptions that aren’t being discussed much these days, especially by liberal advocates.

Their reasoning went something like this:  Americans spend too much money on healthcare, but they’re insulated from the consequences of that expenditures by insurance.  We’ll remove some of that insulation by taxing health benefits.  That will lead to greater awareness of costs, which in turn will change behavior and force down overall costs (or “bend the cost curve,” in the new parlance).

There’s a reason why this logic isn’t getting much exposure these days:  It’s hard to defend. Typical wage earners have little influence over their health care costs.  Doctors make recommendations about care that patients are loathe to reject.  A generation of experimentation hasn’t changed that much, although I strongly support continued work in that area.  But the “facts on the ground” are these:  Doctors, not patients, control health demand.

What’s more, the choice of benefit plan and insurance provider rests with the employer, not the employee.  So the idea that taxing health benefits will “bend the curve” doesn’t seem like a persuasive one.

Perhaps I’m making unfair assumptions about the reasons why some analysts support taxing benefits rather than, for example, increasing taxes on the top 1% of earners.  But the fact remains that even a well-structured benefits tax is less progressive than other new taxes would be.  Liberal analysts like Prof. Pollack need to give their colleagues a persuasive rationale for imposing this form of taxation, rather than another.  And I haven’t heard one yet.

_______________

PS:  As an aside, is it just me?  Sentences like this one from the Treatment post make me uncomfortable: “… (A)ny unions’ hallmark accomplishment was to win generous employer-provided health benefits for their members.”  Not to go all Michael Moore or anything, but in light of other developed nations our union benefits are no longer all that “generous.”  The days of first-dollar coverage for anything are long gone.  Am I missing something?

That said, I do appreciate Prof. Pollack’s call for comity.  The online battle royal gets wearisome sometimes, even for the feistiest among us, so the tone is much appreciated.

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5 Responses to “Why Tax Health Benefits? Unanswered Questions, Unspoken Assumptions”


  1. […] on the support many health policy analysts have expressed for taxing health benefits (an idea I’m not crazy about). The vast majority of health analysts believe there are great savings to be had, along with […]


  2. […] on the support many health policy analysts have expressed for taxing health benefits (an idea I’m not crazy about). The vast majority of health analysts believe there are great savings to be had, along with […]


  3. […] benefits, if the Blue Dogs have their way. That’s a regressive tax, one that’s based on behavioral logic that seems questionable at best to me. Taxing the wealthiest Americans on truly luxuriouis plans (say, ones with concierge medicine […]


  4. […] benefits, if the Blue Dogs have their way. That’s a regressive tax, one that’s based on behavioral logic that seems questionable at best to me. Taxing the wealthiest Americans on truly luxuriouis plans (say, ones with concierge medicine […]

  5. N.J. Says:

    There are really only two option. One is to provide health insurance for those who do not have it, and the other is to tax the benefits of those who do get this additional form of income.

    Anytime one form of income, or one form of spending is given preferential treatment when it comes to taxation, this causes a distortion in the market. Conservatives always discuss these distortions when discussing taxation with regard to business, but there is just as much discussion about the way allowing mortgage interest to be deductible effects the cost of housing.

    Basically such allowances are considered to be indirect subsidies. In countries where mortgage interest is not deductible(the majority of nations do not allow this deduction) the cost of housing is lower and remains more stable. This is applicable to health insurance. Not taxing this form of income for some is largely responsible for it not being affordable for those who do not get the benefit though employment.

    At the rate at which employers are dropping health care plans, in a few short years more people will not have employer provided health care than do.

    Eventually that majority will simply get sick of subsidizing these benefits for others.


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