Taxing Health Insurance

Fact of the Day: About 8,000 subscribers receive these Health Alerts.

Correction on HSAs: My previous statement that the Senate bill would reduce allowable HSA deposits by two-thirds was incorrect. The Senate bill would limit the deductible in small business plans to $2,000 (individuals) and $4,000 (families), as opposed to the current HSA limits of $5,950 and $11,900. As Ron Bachman explained, this would greatly restrict the types of consumer-directed health plans people have access to.  However, as Roy Ramthun explained, the maximum contribution to a Health Savings Account (HSA) is not tied to the deductible. This means (using the above numbers) individuals could contribute $5,950 to an HSA, even though the deductible is only $2,000. Total allowed out-of-pocket exposure, however, (deductibles, coinsurance and copays) would still be limited to $5,950.

Today’s Topic: Barack Obama is taking heat these days for endorsing the same idea he pounded on John McCain for endorsing during the last presidential election: taxing health insurance benefits.

True? Yes and no.

Yes, Obama is being a hypocrite. No, he’s not doing what John McCain proposed to do. Which is too bad.

“Kill [the] Bill”

(requested by Uwe Reinhardt)

The tax on health insurance in the Senate bill really is a tax on insurance. It applies to spending in excess of $8,500 (individuals) and $23,000 (families). But since it’s not indexed to medical prices, eventually it will reach everyone. It’s also very regressive, applying a 40% rate to everyone, regardless of income. Minimum wage workers will be taxed as though they were millionaires.

Defenders say the tax will encourage more economical choices of insurance benefits. Yet the bill has a mandated benefit package that will be more bloated than most people realize. According to Kathleen Sebelius, it’s going to require real mental health parity rather than cosmetic parity and once special interests get geared up, the package will get more bloated over time. Adding to the price tag is a limit on the deductible and out-of-pocket exposure. And let’s not forget guaranteed issue and modified community rating regulations that push up premiums wherever they are implemented.

Bottom line: There is no serious attempt here to keep premiums low or to encourage bare bones health insurance. And as the required health plan becomes more and more expensive over time, the Senate levy that will be imposed on it will look like a tax, act like a tax, walk like a tax…

The McCain health plan, by contrast, would have substituted a new and better tax regime for the current one. People would be able to get all their tax benefits up front, by buying core insurance that everyone should have. Extra benefits would be completely paid for with after-tax dollars. This means that people could switch back and forth between take-home pay and health benefits (substituting one for the other) without tax penalty.

John McCain should never have allowed Barack Obama to characterize his plan as a tax increase. It was instead a tax cut for the vast majority of all workers. And it might have resulted in an increase in take-home pay for almost everyone, once people adjusted to it.

Moreover, the McCain proposal was highly progressive. Much more so than what has been proposed in either the House or Senate versions of ObamaCare.

Comments (14)

Trackback URL | Comments RSS Feed

  1. Vicki says:

    Good musical pairing. I too would like to kill the bill. But does it have to be so bloody?

  2. Ken says:

    Vicki, you want to make sure it’s dead, don’t you?

  3. Larry C. says:

    Hard to see why this one issue is such a problem for the House Democrats. Virtually all of the bill is funded by taxing and reducing benenfits for the middle class. Why single out one element of it? The other elements are just as bad or worse.

  4. Bret says:

    I like the idea of everybody getting the same tax subsidy, regardless of how much the insurance costs and regardless of how it is obtained. Makes sense.

  5. Beverly Gossage says:

    I’m sure Roy was not saying “would no longer be tied to the deductible” since currently the contribution limits to an HSA are not tied to the deductible. One can contribute the full $3050 if one has a single coverage HDHP ($6150 if a dependent is also on the policy), even if one has the smallest deductible allowed(currently 1200/2400 respectively).

    The limit of 2000 deductibles for small group plans raises the rates for HDHP plans for many businesses since the average deductible for those plans are 2500-3000. Many carriers only offer the 2500 deductible plus plans. Under this bill, the only way a small business with a higher than 2000 deductible HDHP currently could keep an HSA (without substantially raising premium rates)and stay within the law, would be for them to find a carrier that has a 2000 deductible with a coinsurance of less than 100% which could move the higher out of pocket to the coinsurance portion of the plan.

    By the way, my HDHP clients are asking for larger deductibles, not smaller.

  6. David R. Henderson says:

    John, I’m not defending the tax and I much prefer the McCain version, but if I understand it correctly, it’s not regressive. It’s proportional: 40% for everyone. It’s also what’s known as a flat tax: flat and high. Like a mesa.

  7. Uwe Reinhardt says:

    Tow points:

    1. John Goodman is a naughty boy. He makes it appear that I want to kill the [health reform] bill. I would not. The song merely reminds me of Grace-Marie Turner of the Galen Institute shlashing away at Obamacare, so we are celebrating her with it. It’s a great song.

    2. John opines that “Obama is being a hypocrite.” That is so harsh. I would put it more gently, thus: “Obama is being a regular President of the United States.” They all tend to say one thing during election campaigns and do another once they govern.

    Suppose, for example, presidential candidate Ronald Reagan had promised during his election campaign in 1980:

    a. If elected President, I will deploy U.S. Marines to Lebanon. But should they come to hram there, I will order them the haul down the flag and hightail out of there. And I will not retaliate against Hezbollah there, who would be likely to cause that harm.”

    b. If elected President, I will send my trusted friend Donald Rumsfeld to Iraq in 1983, there to pay court to the tyrant Saddam Hussein to reestablish diplomatic and trade relations. President Carter rashly had cut those relations, declaring Iraq a terrorist state. I am more pragmatic.”

    c. If any American citizens are held hostage abroad, I am prepared to trade arms for the release of these hostages — and I may throw in a bilble and a cake to boot.

    d. If I am elected President, I will expand the government-run Medicare program to give the elderly coverage for prescription drugs.

    e. If I am elected President, I will grant the American people a massive tax cut, but I will not cut government spending. Instead, I’ll just triple the federal debt during what I hope will be my 8-year tenure.

    f. etc. etc.

    All of these things did happen. But had Reagan been honest about his later “pragmatism” and “realpolitik” during the election campaign of 1980, would he have been elected?


  8. Ron Bachman says:

    My read is that the dollar tax limits will apply to health premiums, not just medical premiums. I think that at least vision and dental costs will be included. That will push even more individuals and families into the penalty status. My cynical side believes that once the administration sees the tax potential, they will consider other coverages as well. Maybe, disability plans, accidental death, specific disease plans, long term care, allocated costs from on-site clinics, separate premiums/fees for concierge medical care, etc. etc. I do not believe their appetite for taxing has any limits.

  9. John R. Graham says:

    Back in the day, I ran the numbers on Sen. McCain’s presidential proposal and confirmed that it was a tax cut for households up to about $150,000 annual income, i.e. almost everyone (, p. 24).

    By taxing so-called “Cadillac” health plans in isolation from household income, the current reform incoherently taxes health insurance rather than high earners, which is an odd choice for a “progressive” policy.

    With respect to the looming death of HSAs, it matters little whether they are explicitly abolished in the legislation. As Roy Ramthun noted, the U.S. Secretary of HHS will have power to arbitrarily decide whether employer contributions to HSAs are counted towards the actuarial value of the health plan (p. 115, lines 12-18 of the Senate bill as passed). If I understand Mr. Ramthun correctly, some “Bronze” plans (in the Senate bill) might qualify, but those named after the more precious metals will not.

  10. John Goodman says:

    David: good catch. The tax on insurance is a flat rate. It just happens to be a rate way above what most taxpayers ordinarily pay.

    Uwe: Obama spent millions and millions of dollars attacking McCain on this one issue — far more than any other. So this goes way beyond someone changing his mind. Also I don’t think Obama or anyone advising him actually has chaged his/her mind. There is no evidence of that. So this can fairly be called “hypocrisy.”

  11. Bart Ingles says:

    “Minimum wage workers will be taxed as though they were millionaires.”

    How many minimum wage workers receive health benefits worth more than $8,500?

    I still think it’s no coincidence that most workers affected by the cap are at or near a 40% marginal tax rate (including payroll taxes). The excise tax is simply a round-about way of capping the employer tax exclusion at $8,500.

    This means the actual value of the tax exclusion is capped at .4 x 8500 = $3,400. Since this is considerably higher than the $2,500 tax credit proposed by McCain, so it’s hard to see why a supporter of McCain’s plan would object to this excise tax. Although I understand that Dr. Goodman is taking issue with Obama’s hypocrisy, and not with the excise tax itself.

    The combination of the employer tax exclusion and the excise tax– or an equivalent $8,500 cap on the tax exclusion itself– is still highly regressive. And I agree the McCain tax credit was highly progressive. But I wonder why either is justified?

  12. Bart Ingles says:

    The combination of the employer tax exclusion and the excise tax– or an equivalent $8,500 cap on the tax exclusion itself– is still highly regressive.

    Let me restate that:

    The combination of an employer tax exclusion and the excise tax– or an equivalent tax exclusion with an $8,500 cap– is still highly regressive.

  13. cheryl says:

    The biggest problem with the whole bill is that it in no way addresses health care.
    It is all about funding healthcare. Getting middle class Americans to pay for government run health programs that are out of money and failing because the government never had any control over them to begin with.
    They keep bringing up Medicare but very few mention Medicaid, (Welfare). I find it disturbing and unbelievable that this isn’t being talked about.
    It is one of the biggest expenses in the healthcare system.
    I don’t see anything in either bill that talks about the problem and cost of millions of people using emergency rooms for their doctor visits.
    Unless that behavior is changed the cost to those of us funding healthcare is just going to keep going up. If I am paying for the people who live off the government, then I want to see changes in behavior and I want the government to enforce the changes.
    These people already have government healthcare and they will continue to receive healthcare and they will continue to use ER’s for their healthcare.
    So what changes for them?
    We can not continue to pay 5 times the cost of a doctors visit for them everytime they use the ER for an earache.
    They threaten to fine people who don’t buy health insurance, lower medicare benefits, reduce our access to healthcare, tell us what kinds of drugs we will or will not be able to have, how often we can see a MD, etc.etc. but talk about nothing to address the ER frequent flyers.
    This would require the government demanding discipline and accountability for ones own behavior. It would mean they would have to take the responsibility for finding a doctor, make and appointment, show up for the appointment, then follow up with the recommendations of the doctor. Then continue to see the doctor for monitoring health care etc.
    That’s too much to ask of freeloaders. It is just so much easier to call a taxi, get a ride to the ER with family and friends in tow, order some Burger King, bring a boombox, set up some chairs and have a little gathering, while we wait for the doctor to see little Shiela’s boo boo.
    This is happening in every ER in America, and is especially rampant if the hospitals are in the cities, which most are.
    Who is going to continue to pay for this? We are! The people who get up every morning to go to work to make a decent way of life.
    When are Americans going to wake up and say enough!
    I am not going to tolerate it anymore.
    Make these people conform to society or close the ER doors except for EMERGENCIES!!!!!!!!!
    The liberals are afraid, ya know, political correctness and all that. I say through those damn useless words out the window and start saying what needs to be said and facing the problems head on and if it steps on someones toes or hurts their feelings so be it. The truth has to be the rule, not the exception.
    It is destroying America.

  14. Easter Treats says:

    Just want to say your article is as amazing. The clarity to your post is simply great and that i could assume you’re an expert in this subject. Well together with your permission allow me to grasp your feed to keep updated with drawing close post. Thanks one million and please continue the enjoyable work.