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Obama's healthcare tax plan: How risky?

Obama proposes taxing high-end health coverage to help pay for tax credits for the uninsured. That could be controversial for many Americans with employer-based care.

By Staff writer / September 11, 2009

In his speech to Congress this week, President Obama said a tax on higher-end health insurance plans would be a "modest" change that "could help hold down the cost of healthcare for all of us in the long run." But it's a controversial proposal. Labor leaders worry that it could affect many union workers.

Manuel Balce Ceneta/AP

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President Obama's proposed healthcare reforms seek to use the tax code as both carrot and stick – to help low-income Americans afford health insurance and to impose some cost-cutting pressure on the industry.

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The carrot is a potentially costly one: tax credits to help many lower-income Americans meet a new mandate for all to buy health insurance.

The stick is a tax on higher-end health insurance plans. This would give the government some revenue to help pay for its tax-credit subsidies. And by making gold-plated insurance coverage more expensive – and thus making customers think twice about buying it – it might restrain the runaway growth of healthcare spending in the US.

"This modest change could help hold down the cost of healthcare for all of us in the long run," Mr. Obama said in his speech to Congress Wednesday.

Expensive and politically fraught

As a general idea, this carrot-stick strategy is something that many health policy experts embrace.

But as outlined by Obama, these tax-code changes promise to add to the federal budget deficit. That means the president is counting on other sources of revenue to keep the pledge that his overall plan won't add "one dime to our deficits either now or in the future."

The proposal is politically risky on many fronts. One example: Labor leaders worry that a tax on all high-end health plans could affect many union workers, who have been important supporters of Obama and his fellow Democrats. Although the tax falls on insurance firms, the cost would be passed to employers and their workers.

Getting away from employer-based care
Taxing high-end health plans, moreover, could coax forward what many health experts say is a difficult but needed transition away from employer-based health insurance. Today, most Americans who have health coverage get it as part of a workplace benefits package. Few policymakers would design a healthcare system that way if they were starting from scratch. But they are also wary of simply scrapping the system that millions rely on today.

Over the decades, employer-centered insurance has been nurtured by the tax code itself. Money spent on work-based health plans is not taxed as employee income, while individuals who buy their own health insurance get no such tax deduction on their premiums. The employer tax break cost the government $246 billion in 2007, the Congressional Budget Office estimates.

Obama isn't calling for an outright end to the tax break for employer plans, but in effect he would roll it back at the high-end of the marketplace. Because this is a relatively modest change, it would cover only a fraction of the estimated $900 billion cost of the president's plan over the next decade.

Beyond the White House, a range of policymakers from both major parties have endorsed using the tax code, in various ways, to reduce the number of the uninsured or to tame spending. A recent Brookings institution report on cost control includes a cap on the tax exclusion for employers as one of its top ideas – with the goal of encouraging the availability (from insurers) and choice (by consumers) of more cost-effective coverage.

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