Taxing Health

The New York Times reported over the weekend that the Obama Administration is considering taxing employee healthcare benefits.

The proposal is politically problematic for President Obama, however, since it is similar to one he denounced in the presidential campaign as “the largest middle-class tax increase in history.” Most Americans with insurance get it from their employers, and taxing workers for the benefit is opposed by union leaders and some businesses.

In television advertisements last fall, Mr. Obama criticized his Republican rival for the presidency, Senator John McCain of Arizona, for proposing to tax all employer-provided health benefits. The benefits have long been tax-free, regardless of how generous they are or how much an employee earns. The advertisements did not point out that Mr. McCain, in exchange, wanted to give all families a tax credit to subsidize the purchase of coverage.

I guess that last sentence is the Times’ roundabout way of admitting that Obama shamelessly lied about McCain’s healthcare plan during the presidential campaign.

McCain’s plan attempted to level the economic playing field between employer-funded health plans and self-funded individual health insurance plans. Employer-funded health plans, a WWII wage and price control era anachronism, are currently tax deductible to the employer and provide a tax-free benefit to the employee. By contrast, an employee who has to buy his own health insurance receives no tax deduction. This disparity in tax treatment makes it impossible for self-funded health plans to be price competitive with employer-funded coverage.

McCain’s plan would have gone a long way to minimize the tax disparity between employer-funded and self-funded plans by taxing the employer-funded health benefits while giving individuals a $5,000 tax credit to purchase health insurance coverage. Contrary to Obama’s disingenuous and misleading political ads, the McCain health plan would have resulted in no tax increase for most people (save perhaps a handful of CEO’s and others with “gold-plated” Rolls Royce plans offering coverage for cosmetic surgery, health resort stays, etc.) because the tax credit would more than offset the tax owed. [Taxation 101: The average cost of most health plans is around $10,000–$12,000. Assuming a 33% bracket, the additional tax on a $12,000 benefit is $4,000, or $1,000 less than the $5,000 credit under the McCain plan.]

The greatest beneficiaries of the McCain health plan would have the millions of working Americans who do not receive health insurance benefits from their employers. For someone who marketed himself as a champion of the working poor, Obama perpetrated a gigantic swindle on the people he pretends to help.

To take a real-world example, consider my friend John who is married with three children and earns approximately $60,000/year working for a small company that provides no healthcare benefits. John’s income is too high to qualify for Medicaid or income-based health insurance programs, but not high enough to purchase health insurance while supporting three children. So John has his kids enrolled in CHIP and foregoes health insurance coverage for himself and his wife. Under McCain’s plan, John would have received a $5,000 tax credit towards health insurance for himself and his wife. While that would not pay for a “gold-plated” plan, John’s $5,000 tax credit would go a long way toward providing him and his wife with a decent “no frills” plan. Certainly he would have been better off than in his current uninsured situation.

During the 2008 campaign, Obama and Biden repeatedly claimed that McCain’s healthcare plan would tax employee healthcare benefits “for the first time in history.” Now Obama himself is considering taxing employee healthcare benefits. The difference is, with McCain’s plan, taxpayers would receive a tax credit to offset the loss of the deduction. Obama’s plan does not include a tax credit.

In short, Obama’s latest plan would tax employee healthcare benefits “for the first time in history.”

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