Perhaps the most hot button issue in domestic politics these days is the growing healthcare problem in the United States. In 2004, nearly “46 million Americans, or 15.7 percent of the population, were without health insurance.” [1] While the majority of Americans receive healthcare insurance through their employers, the issue has been exacerbated by rising healthcare costs, limited coverage, “an increasing reliance on part-time and contract workers who are not eligible for coverage,” and “small employers [who] cannot afford to offer health benefits.” [2] Further, even the insured are being asked to make larger contributions for their coverage, forcing many to remain uninsured because they cannot afford these contributions. [3] During his State of the Union Address on January 23, 2007, President Bush sought to tackle the issue by proposing to tax healthcare benefits but to also offer a $15,000 standard deduction or $7,500 deduction for those filling single. [4] However, critics rail against the proposal suggesting it does nothing to lower healthcare costs and eliminates problems with the current system by creating others. [5]
Under current healthcare laws, employees may exclude employer-paid coverage from their gross income as a fringe benefit under Section 106(a) of the Internal Revenue Code and employers may deduct amounts paid. [6] However, those who pay for their own health insurance receive no deduction under Section 106 and receive only minor deductions throughout the Tax Code. [7] These people must spend after-tax dollars on health insurance which are deductible under Section 213 of the Internal Revenue Code “to the extent those expenses exceed 7.5% of adjusted gross income.” [8] This system strongly favors employer-provided health insurance through tax benefits creating an incentive to employers to provide additional compensation tax-free, while disfavoring individual-paid health insurance. [9]
During World War II, the government set out to create an incentive for employer-provided health insurance by allowing employers who paid for health insurance to deduct these expenses while allowing employees to exclude the expenses from their income without recognizing additional taxable income due to wage and price controls. [10] Breaking from this logic, “Bush’s proposal in a nutshell is to end the preferential tax treatment for employer-provided health insurance.” [11] At his State of the Union Address, Bush proposed to eliminate the full exclusion of employer-provided health insurance and instead treat these amounts as income. [12] However, this income would be subject to a $15,000 standard deduction or $7,500 for individuals filing single. [13] Therefore, under Bush’s proposal, people would only pay taxes on health insurance programs exceeding $15,000 or $7,500. [14]
Supporters of Bush’s proposal include the nonpartisan Urban Institute who calls the policy “a major step toward improving the efficiency of the market for health insurance. By severing the link between work and insurance, it would offer everyone the same tax incentives to obtain insurance coverage and limit spending on healthcare.” [15] Proponents suggest the policy will spur innovation and competition within the health insurance industry, forcing employees to closely compare health care options driving down costs. [16]
Proponents also suggest the proposed system offers many advantages over the current system. Economist Arnold King criticizes the current system suggesting:
“Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a healthcare provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price. Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.” [17]
Additionally, critics chastise the current system stating “[t]he biggest beneficiaries of the current system are high earners with employer-provided insurance. The biggest losers in the current system are low earners without employer-provided insurance.” [18] Bush’s proposal strives to eliminate the taxing disparity between employer-provided health insurance and those who self-insure.
Supporters of the Bush proposal also stress the program is a benefit to small business, as one small business owner wrote to the New York Times that “[p]utting the burden of selecting and paying for health benefits on employees would increase their cost sensitivity, allow better tailored coverage and allow small and medium-size employers to provide other benefits that are every bit as critical to the future of our nation.” [19]
The plan has not been well received by labor unions and certain employer groups. [20] “[E]mployers haven’t wanted to lose the deduction, and politicians have flinched at the prospect of taxing voters on something they have been getting tax free.” [21] Others criticize the plan stressing it “gives tax breaks to the affluent with insurance and fails to help low income uninsured people.” [22]
In addition, there have been many concerns about the individual health insurance market. As Richard J. Umbdenstock, President of the American Hospital Association stated, Bush’s “tax proposal would have the effect of driving people to the small-group insurance market – a market that has proved unstable. For many people, even with a tax break, coverage would remain unaffordable.” [23] The plan is also criticized as not ensuring the availability of health insurance at a reasonable price. [24]
Rather than a uniform credit for individuals of all income brackets Henry J. Aaron, a senior fellow at the Brookings Institution in Washington, suggests “offering larger credits to low-income households, which need help, rather than to high-income households, which don’t.” [25] A plan such as Aaron’s would combat concerns about creating a tax break only for the wealthy while still mitigating the disparity that exists in the current system between employer-provided health insurance and individually purchased health insurance plans. [26]
Despite the taxing differences of the Bush proposal and the current system, many feel that the taxing system is not the proper venue to enact necessary lasting healthcare reform. Other ideas include revising “the antiquated educational requirements needed to practice medicine” in order to create a “plentiful supply of creative, compassionate, and reasonably priced physicians,” a national healthcare system, or even structuring an educational system directed at lowering the costs of medical education. [27]
As a Lehman Brothers political analyst noted, “[t]he proposal was not well received in 2005, and we do not expect it to be received very well this year… The probability for enactment is very low in our view.” [28] Whichever way the political winds blow, the issue of healthcare reform is not likely to be solved under the Bush Administration and will still likely be among the most pressing domestic issues in the upcoming 2008 election.
Sources
[1] National Coalition on Health Care, Facts on Health Insurance Coverage, http://www.nchc.org/facts/coverage.shtml (last visited February 11, 2007).
[2] Id.
[3] Id.
[4] James Pethokoukis, The War Over Healthcare Begins, U.S. NEWS & WORLD REPORT, Jan. 24, 2007, available at http://www.usnews.com/usnews/biztech/capitalcommerce/070124/the_war_over_healthcare_begins.htm.
[5] Henry J. Aaron, Three Steps to Better Healthcare, LOS ANGELES TIMES, Feb. 10, 2007, available at http://www.latimes.com/news/printedition/opinion/la-oe-aaron10feb10,1,3169006.story?coll=la-news-comment.
[6] Sheryl G. Stolberg & Robert Pear, Bush Urges Tax To Help Cover The Uninsured, N.Y. TIMES, Jan. 21, 2007, at 1; I.R.C. §106(a).
[7] Bob Lyke, Tax Benefits for Health Insurance and Expenses: Current Legislation, Congressional Research Service, Feb. 23, 2005, available at http://www.law.umaryland.edu/marshall/crsreports/crsdocuments/IB9803702232005.pdf.
[8] Laura E. Cunningham, National Health Insurance and the Medical Deduction, 50 TAX L. REV. 237, 237 n.1 (1995).
[9] Michael Barone, A Fair Health Fix, U.S. NEWS & WORLD REPORT, Feb. 11, 2007, available at http://www.usnews.com/usnews/news/articles/070211/19barone.htm.
[10] Id.
[11] Id.
[12] Pethokoukis, supra note 4.
[13] Id.
[14] Robin Weage, Bush Tackles Health Care, ToTheCenter.com,
http://www.tothecenter.com/news.php?readmore=844 (last visited February 11, 2007).
[15] Pethokoukis, supra note 4.
[16] Id.
[17] Id.
[18] Barone, supra note 9.
[19] Weage, supra note 14.
[20] Pethokoukis, supra note 4.
[21] Barone, supra note 9.
[22] Weage, supra note 14.
[23] Id.
[24] Aaron, supra note 5.
[25] Id.
[26] Id.
[27] Health-Care-Reform.net, Health Care Reform: Attacking the Root Problems, http://www.health-care-reform.net/ (last visited Feb. 11, 2007).
[28] Pethokoukis, supra note 4.