Reforming the Tax Treatment of Health Insurance

In Decmember, 2010 I wrote a post identifying what I thought a health reform compromise between Progressives and Conservatives might look like. One of the suggestions was reforming the tax preference now given to employer provided health insurance (Aaron and Austin on the mechanics). Here is what I wrote in December:

End the tax exclusion of employer paid insurance. This is easily the most consequential policy that we could undertake to slow cost inflation in the private market. The Deficit Commission suggested this. It has long been a mainstay of Republican health care plans, like Sen. McCain’s, and the Patients’ Choice Act, the most comprehensive Republican bill submitted in the last Congress (but never scored by CBO). The tax on high cost insurance that is in the ACA (delayed by the reconciliation bill until 2018) is a back door way of achieving the same policy goal of slowing cost inflation. It would be better to cap this tax subsidy in a more straightforward manner and to do so sooner rather than later. It will take both sides to take this politically difficult step.

There is word that reforming the tax preference of employer paid insurance is being discussed in the debt ceiling debate. I think the current debate about raising of the debt ceiling is one of the dumbest debates ever; Congress already voted for the spending, they are now voting to tell the executive branch to carry out the spending they already approved!

However, if there is a reform of the tax treatment of employer paid health insurance that would be good news, no matter how it comes about. For wonks, it is the most obvious next step for anyone who thinks we need to address health care costs. Avik Roy for example is for it and we often disagree on many things, but not on this. Further, the debt ceiling debate is the type of negotiation that might be the only way to take the most obvious next step to address health care costs, because it is removing a powerful subsidy that benefits upper middle class persons with good employer-provided health insurance (like me).

Democrats have already voted for it in the ACA (the tax on high cost insurance is a de facto capping of this subsidy), and Republicans almost always have a reform like this as the center of their health reform plans. Taking this step will expand the ability to the ACA to address health care costs, but it is also a flexible policy that will work as intended alongside of any reform approach I can imagine.

Update: since the demise of the Clinton Plan, just about every Conservative reform plan has had changing the tax treatment of employer paid insurance as key. Pauly and Goodman in 1995, etc. Interestingly, it was the Dems that first passed a capping of the unlimited preference in the form of the high cost insurance tax. If both sides limit it in a more straightforward manner and do it sooner than 2018 it will be a big step, and dare I say, a bipartisan move ahead on health reform (that probably dooms it).

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