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Make Employer-Based Insurance Taxable? Surprisingly, the Right Solution

Unlike Obamacare, this reform would benefit most Americans.

by
John R. Graham

Bio

January 31, 2014 - 11:02 pm

With millions of Americans suffering from Obamacare, the time is right for Republicans to advance a solution that addresses the broken health insurance market.

As things now stand, government policies pigeonhole different categories of people into different health-insurance markets. People who are self-employed, unemployed, employed by large firms, employed by small firms, or over 65 all participate in different health-insurance markets. When you work for somebody else and lose your job, you lose your health insurance. Even if you keep your job, your employer can change your health plan for any reason.

Obamacare made this worse by adding another broken health-insurance market into the mix — exchanges.

Health insurance should be chosen by individuals and families, just as with auto insurance, life insurance, or homeowners insurance. That is the only way to encourage insurers to sell policies designed to meet patients’ needs.

Employer-provided health insurance is excluded from workers’ taxable income. This is a significant benefit. On average, such health benefits are worth about $16,000 per household, of which employers pay about three-quarters of the cost and employees the rest, from pre-tax income. But to allow a real market for health insurance to arise, Congress should amend the tax code so that the entire $16,000 goes to employees as taxable income.

People get upset by the idea of changing a non-taxable benefit to taxable income. They shouldn’t. The tax revenue would immediately be recycled into a tax credit, refundable to each person who buys health insurance.

This means that for each dollar spent on medical insurance, an individual’s income tax bill would be reduced by a dollar. For the average family with employer-based benefits, a tax credit would be worth more than the current tax exclusion, which gives a larger benefit to higher-income households.

According to the Congressional Budget Office, the exclusion of employer-based health benefits from households’ taxable income reduced federal tax revenues by some $248 billion in 2013: the largest “tax expenditure” in the Internal Revenue Code. However, because of our progressive income-tax code, the lion’s share of this goes to those who need it the least. The top 20 percent of earners get 34 percent (more than $84 billion) of the total value; the lowest-earning 20 percent gets only 8 percent (about $20 billion) of the benefit.

If the government converted the exclusion to a tax credit and distributed the revenue equally to all income-tax filers — with upper-income individuals, those at the lowest end of the earning scale, and all those in between receiving the same benefit — each “quintile” would receive $49.6 billion. For the lowest quintile, this would be an increase of 150 percent (almost $30 billion) over the current value of the tax exclusion. For the second lowest, the increase would be 43 percent (around $15 billion). And for the middle quintile — individuals who earn between $38,500 and $55,099; or families of four who earn between $77,000 and $110,200 — the increase would be 5 percent (around $2.5 billion).

Now, when individuals lose their jobs, they can maintain coverage via the clumsy and costly mechanism of COBRA. However, COBRA coverage is not available to those whose employers drop coverage entirely or go out of business. Also, COBRA expires after 18 months. Obamacare tries to address such problems, but has succeeded only in making them worse.

Having a policy in the individual market turns out to be a preexisting condition that results in having one’s health insurance canceled. Before the dreaded employer mandate kicks in, legislators can square things by making the individual market the market of first resort.

Reformers should not shrink from this task. Such a reform, based on turning the tax exclusion into the tax credit, would benefit most Americans. Now that Obamacare has shown its flaws, the time is right to advance such reform.

John R. Graham is Senior Fellow at The Independent Institute in Oakland, CA.

Comments are closed.

Top Rated Comments   
Here's an easier way: legalize all insurance contracts. Allow insurance companies to create any contract an individual demands without government restriction, regulation, or tax. The first thing we'd all get is supplemental insurance.

I'd buy a supplemental insurance policy for job termination. We'd have options: with/without routine care, catastrophic care, psychological therapy, etc. We'd have policies that have no premium when we are unemployed, or no premium if unemployed for an extended period, etc. We'd have a policy with another company to switch insurers when fired. All this would cover preexisting conditions but we'd get these policies decades before leaving the workforce so they'd be dirt cheap.

I might buy a supplemental plan to cover premium hospitals and doctors. Or I might buy a supplemental to cover a particular hospital that my employer doesn't cover (like Sloan-Kettering Cancer in NYC). Supplemental plans can relieve my employer from trying to cover everything for everyone. They'd scale back health insurance to the minimum (catastrophic) and allow us to add what we'd like.

Then I'd allow employee spending accounts to pay for supplemental insurance with per-tax dollars. Problem solved.
42 weeks ago
42 weeks ago Link To Comment
Health Insurance is the problem, not the solution. Of course, what we call Health Insurance isn't insurance at all, it is subsidized health care. And costs will NEVER go down until those subsidies are removed. The reason is that the true costs of medical care are hidden from the only party that has an interest in efficient service - the patients.

So, what is the main point of Obamacare, single payer, or any other form of communist health care? Well, the purpose is to further hide the actual costs of the service so that the commissars and their cronies can exploit the people to become even richer and more powerful.

It isn't misguided, it's evil.
42 weeks ago
42 weeks ago Link To Comment
The problem is what the government giveith, the government can also takeith away. It would only be a short matter of time until the tax credit would be rescinded as the beast of government grows ever more hungry for revenue.
42 weeks ago
42 weeks ago Link To Comment
All Comments   (47)
All Comments   (47)
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Here's a way t do it without taking anything away: create a Healthcare Saving Account, but reduce eligibility dollar for dollar, by what the employer pays for your group care. (And what you pay.) That will make the transition to either a private policy or a personal-affiliation group policy almost painless, and will encourage employers to remove the phony gold-plate and concentrate on catastrophic and high-value coverage. Say, could credit unions, with their "common bond", offer access to group coverage?
42 weeks ago
42 weeks ago Link To Comment
"The tax revenue would immediately be recycled into a tax credit"
It's a big assumption that this is true. I have my doubts.
42 weeks ago
42 weeks ago Link To Comment
Asking for a bit of education here.... I'm not an insurance agent or an economics major - just an average joe trying to make sense of it all. It seems as if our government often offers incentives (in the form of tax breaks or credits) to encourage businesses & individuals to engage or refrain from some behavior/practice that they want to encourage or discourage..... Taxes on alcohol or credits towards "green" improvements for your home come to mind. So, why doesn't the govt offer some kind of tax incentive to businesses to provide (and individuals to buy) health insurance? Wouldn't folks be more inclined to ensure they had health insurance if they could also claim some kind of tax credit for it? They might even opt for a pricier, more inclusive plan? I'm sure there is an a truck-load of regulatory arguments against this, but if these kinds of tax incentives work for modifying social, consumer, and business behavior, why wouldn't we also apply them to the problem of health care coverage?
42 weeks ago
42 weeks ago Link To Comment
Do you want the economy to shoot up into the greatest economic expansion known to mankind since the dawn of History?

Stop taxing income. Eliminate Social Security. Eliminate worker compensation insurance. Eliminate, in fact make it illegal to tax work in any way. If you do that an allow any insurance company to enter into any contract with any citizen in any way they please... you shall see enough economic growth and state revenue to pay the national debt ten times over.

Of course, for LIBERALS like you TAXING SOMETHING is the only way out.
42 weeks ago
42 weeks ago Link To Comment

You:

Tar.
Feathers.
Rail.
42 weeks ago
42 weeks ago Link To Comment
This is the third dumbest idea regarding health care policy. Number one is single government payer, number two is obozo care.

How about: what happens between my employer or my doctor and I is none of your business, and not something for the government to start taxing.
42 weeks ago
42 weeks ago Link To Comment
Right now, what happens between you and your employer is the government's business, because they administer the tax exemption and set the parameters for what is and isn't considered health insurance. Eliminating the tax exemption would be a way to make it really between you and your employer.
42 weeks ago
42 weeks ago Link To Comment
Increase my taxable income by $16,000? Quite frankly, they already get enough of my money. I also have a chronic condition that I didn't volunteer for. Everybody is trying to reach the point that I'm not going to be able to afford to live.
42 weeks ago
42 weeks ago Link To Comment
If you're allowed to take a tax credit for buying insurance or contributing to an HSA, then it'll be close to a wash for you--it could even be advantageous for high-expense taxpayers.

I will grant you that there are all sorts of ways for this to get screwed up in the legislative process, but I suggest you look at what's coming down the pike with the "cadillac tax" in 2018.
42 weeks ago
42 weeks ago Link To Comment
Here's an easier way: legalize all insurance contracts. Allow insurance companies to create any contract an individual demands without government restriction, regulation, or tax. The first thing we'd all get is supplemental insurance.

I'd buy a supplemental insurance policy for job termination. We'd have options: with/without routine care, catastrophic care, psychological therapy, etc. We'd have policies that have no premium when we are unemployed, or no premium if unemployed for an extended period, etc. We'd have a policy with another company to switch insurers when fired. All this would cover preexisting conditions but we'd get these policies decades before leaving the workforce so they'd be dirt cheap.

I might buy a supplemental plan to cover premium hospitals and doctors. Or I might buy a supplemental to cover a particular hospital that my employer doesn't cover (like Sloan-Kettering Cancer in NYC). Supplemental plans can relieve my employer from trying to cover everything for everyone. They'd scale back health insurance to the minimum (catastrophic) and allow us to add what we'd like.

Then I'd allow employee spending accounts to pay for supplemental insurance with per-tax dollars. Problem solved.
42 weeks ago
42 weeks ago Link To Comment
Well, I'll be. Someone thinks that taxing stuff fixes stuff. Right. As if we don't already have an IRS problem. This guy thinks creating new forms of taxation fixes problems.

How would you like your "NO"? Served on a cedar plank along with some Fava beans and a nice bottle of chianti?

sigh.
42 weeks ago
42 weeks ago Link To Comment
or maybe ALL med insurance should be tax deductible.......???????
42 weeks ago
42 weeks ago Link To Comment
Along with ALL medical expenses, (from the 1st dollar, not after you have spent 10% of your income). Add to that any expense that actually IMPROVES your HEALTH, not just covers "sick care". Things like your gym membership, hiking boots, a bicycle & all the organic food, vitamins, minerals & supplements you buy. Also, when you are so sick that you need a full time care-giver, so if this is a family member & they can't work because the are taking care of you, their lack of income should be a write off, (like Hubby did last in 2012 when I had cancer). There should be ZERO penalties for drawing down your retirement savings, if the money is used for catastrophic health care costs, as long as you pay it back in 5 yesrs, or a small penalty if not paid back in 10 years, & the full penalty, if not repaid after 10 years...isn't having cancer + having to pull your retirement funds so they draw no interest punishment enough? Finally, when your tax deductions (due to a catastropic health problem) exceed your income for that year, you should be able to bring the rest of the deductions "forward" as many years as it takes to "break even". When you experience this situation the "financial pain" doesn't go away just because the calendar flips over to a new year...I know, we are living this nightmare!!
42 weeks ago
42 weeks ago Link To Comment
I can agree with the medical expenses part.... hiking boots, organic food, etc...seems excessive and superfluous.
42 weeks ago
42 weeks ago Link To Comment
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