If Washington puts aside its spring of scandals and gets back to its normal summer agenda — fighting about taxes and entitlements — the king of all tax breaks won’t be on the table.
The tax break on employer-sponsored health plans is one of the government’s largest tax expenditures, costing the feds $200 billion to $300 billion a year, depending on who’s doing the estimating.
But it’s also proved to be one of the hardest to undo — arguably even more so now that the Affordable Care Act is full steam ahead.
For one thing, lawmakers are wary of any policy changes that could contribute to higher health care costs for businesses, which already fear the health law will hurt their bottom line. Or higher costs for workers, who are also worried about how much they already pay for health care. And Republicans, still licking their wounds from a failed war to repeal Obamacare, aren’t interested in venturing out on a health policy limb.
Both parties know the abstract economic rationale for eliminating the gigantic tax. Liberals say it’s regressive. Conservatives say it hinders individual consumer choice in an insurance free market. Health wonks say it promotes wasteful patterns of health care consumption.
But taking away a tax break on health insurance that millions of Americans are used to is something that neither party wants to touch with a 10-foot pole.
“It’s come up in the past, but I think the Affordable Care Act has kind of frozen us in a way on health care tax policy,” said Rep. Pat Tiberi (R-Ohio), chairman of the Ways and Means panel’s Select Revenue Measures Subcommittee.
Earlier this year, when Ways and Means Committee Chairman Dave Camp and ranking member Rep. Sander Levin assembled 11 working groups to study different areas of tax reform, health care-related tax policy wasn’t even included.
“There wasn’t one on health care, and that was the reason — because the Affordable Care Act was being implemented right before our eyes,” Tiberi said.
The health care law’s employer mandate requires those with more than 50 workers to provide coverage or face a penalty. That provision codifies into law what’s typically the practice for most Americans today, with nearly 60 percent receiving coverage through an employer.
But because of the law — which also includes a new so-called Cadillac tax to start in 2018 on the highest-cost plans — many policymakers feel it’s not the right time to touch the tax exemption. In fact, they say the opportunity came and went after the 2010 law was passed — although there wasn’t that much enthusiasm for it then either.
The health care tax exemption and thousands of other expenditures are in the mix in the “blank slate” approach Senate Finance Committee Chairman Max Baucus (D-Mont.) and ranking member Orrin Hatch (R-Utah) are taking to tax reform. But that doesn’t mean the health exemption is going anywhere soon. The approach just puts the onus on senators and lobbyists to preserve the exemptions they care about the most, like the one for health care.
“Some of the special provisions serve important objectives. Indeed, we both believe that some existing tax expenditures should be preserved in some form,” Baucus and Hatch wrote in a letter to their fellow senators last month.
Rep. Richard Neal (D-Mass.), ranking member of the Ways and Means Select Revenue Measures Subcommittee, said he hasn’t heard any serious discussions about tampering with the health care exemption. He added that he “can’t imagine” taking away one of the major motives for employers to provide health coverage right now.
“Look, it’s a huge tax expenditure — of that there’s little doubt — but I think the incentive is worth it,” Neal said.
Congress passed on making changes to the exemption during the last major tax overhaul in 1986, but it’s lingered in the background of policy discussions ever since.
There was talk of reworking the exemption when Hillary Clinton was putting together the 1993 health overhaul proposal, and she brought it up again during her 2008 presidential campaign. President Barack Obama has proposed putting a cap on all tax exemptions — which could limit, though not eliminate, the break for employer-sponsored coverage.
During his 2008 presidential campaign, Sen. John McCain proposed doing away with the exemption and instead, giving Americans tax credits to buy their own coverage — detaching health insurance from employment. House Budget Committee Chairman Paul Ryan has backed a similar idea.
Sen. John McCain and House Budget Committee Chairman Paul Ryan have, at different times, backed tax credits for individuals to buy their own coverage in lieu of the exemption.
And Sen. Ron Wyden (D-Ore.) also would have ditched the exemption as a way of financing a comprehensive universal health coverage bill he pitched in 2009 as an alternative to the president’s plan.
But in the present climate, Wyden isn’t pushing that idea anymore. “The answer is, ‘No,’” is all he would say when asked whether limiting the exemption should be part of tax reform talks.
The exemption has been a boon and a bane to the health insurance industry. Insurance became closely linked to employment during World War II, and the tax exemption was added in the 1950s.
Today, criticism — but not action — comes from many quarters. Liberals don’t like that it gives disproportionate benefits to richer earners with generous health plans.
Conservatives tend to complain that the current system doesn’t encourage Americans to shop around for the best value for their money since they get what their employer selects or have a choice of a few employer-sponsored plans.
But despite the policy concerns, most agree the exemption is here to stay, at least for now.
“1986 came and went without touching this, and here we are again,” said Stephen Entin, a senior fellow with the Tax Foundation. “If I had to bet, I’d say they won’t touch it again.”
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