In an interview on June 28, David Axlerod, political advisor to President Obama, commented on ABC’s “This Week” that the President would not “…rule out the possibility that the White House might agree to a tax hike on health insurance plans that would hit middle-income Americans.” This follows a campaign during which then candidate Obama promised not to raise taxes for American’s making more than $250,000 (a threshold that was subsequently lowered to $200,000). Furthermore, he ridiculed John McCain for making just such a proposal: "For the first time in American history, he wants to tax your health benefits. Apparently, Senator McCain doesn't think it's enough that your health premiums have doubled. He thinks you should have to pay taxes on them, too." I’m reminded of a former president whose hopes for a second term came to an end when he reneged on a promise made during his first run for office: “Read my lips -- no new taxes.”
It continues to be a busy year on the health care front. The President has made no secret of his intention to make significant changes to the way health care is delivered and paid for in this country. At the forefront of the argument is whether or not a public insurance option should be established to “compete” with private insurers. As expected, private insurers are up in arms about this. President Obama has said that private insurers have nothing to worry about, claiming, “If private insurers say that the marketplace provides the best quality health care, if they tell us that they're offering a good deal, then why is it that the government -- which they say can't run anything -- suddenly is going to drive them out of business? That's not logical.” What hasn’t been said is that, while private insurers have to turn a profit to stay in business, the federal government does not -- at least not in the near term.
The latest estimates from the Congressional Budget Office and Max Baucus, Chairman of the Senate Finance Committee, put the expense for a public insurance option somewhere between $1 trillion and $1.6 trillion over 10 years. So the trillion dollar question left unanswered is where to find the funding to pay for this public option. If the federal government is looking for a stash of cash that hasn’t been tapped, employees’ pre-tax contributions for health care coverage is a logical place to look. Estimates are that these tax savings to Americans cost the federal government nearly $200 billion per year in tax revenue.
The dot that most Americans haven’t yet connected is that this loss of tax savings will result in an increase in their personal tax burden. A change of this nature will hit 170 million Americans like a ton of bricks when they see their tax liability increase the year after the tax savings is eliminated. I’m no accountant, so I’ll use simple math. An employee paying $250/month in health care coverage through his/her employer will see an increase in taxable earnings of $3,000/year. Assuming a 28% tax bracket, that’s an additional $840/year s/he will owe Uncle Sam. This doesn’t include imputed income that could be added for employees covered by employer sponsored health plans that provide coverage over and above some actuarial threshold defined by the government, nor the potential loss of tax exempt status for flexible spending accounts.
The next few months will be interesting. Opposition has been building and will continue to build against the public option being proposed. There are more than a few lobbyists with their hands full in Washington these days. But the President wants to sign something by the end of this year, even if that “something” lacks detail. Whether he’ll be able to garner enough support from both sides of the aisle is yet to be seen. Failure to do so could spell political suicide (if taxing employee benefits alone doesn’t do it). Keep your eyes peeled -- things will be moving fast this summer.
Editor's Note - Greg Dagley is a Benefits Consultant for a large multinational employer in Houston, TX. While his company has employees all over the globe, his job keeps him focused on US benefits and spending a lot of his time managing external vendors. Is there any doubt his Excel skills are more advanced than yours?
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