Issue spotlight: Should health benefits be taxed, and, if so, how?

The issue in brief:

Currently, workers who receive health insurance from their employers don’t pay income or payroll tax on the benefit.  Employers also generally can deduct the cost of health benefits from their income. There are a variety of proposals to change this by making some or all of health benefits subject to federal taxes.

Who is for it?

Many Republicans favor taxing all health benefits.  In addition, some Democrats are seeking partial taxation of benefits - taxing only the most expensive benefit packages and/or only the highest earners - to raise money for expanding coverage to the uninsured and for other health reforms. For example, Max Baucus, chair of the powerful Senate Finance Committee, has proposed a partial tax for that reason.

Who is against it?

Labor and many Democrats - and also a large business group.  Charles Rangel, chairman of the tax-writing House Ways and Means Committee, said recently there was “no way” he would agree to such a tax.  And the National  Business Group on Health, which represents 300 large employers, said taxing benefits would drive up costs and “could have the unintended consequence of driving the cost of health benefits higher and potentially force businesses and/or workers to drop private coverage altogether.”

What are the arguments for it?

Some say it’s unfair that individuals who buy insurance don’t get the tax break, but employers do. Some, such as Baucus, say the tax break benefits mostly high-income people with “Cadillac plan” lavish benefits.

What are the arguments against it?

Studies show the “Cadillac” argument isn’t correct. For example, an analysis in the law journal Tax Notes shows that high insurance costs typically come not from rich benefits but from the extra costs borne by small employers and by employers with older workforces. Changing the tax treatment of benefits could undermine employer-provided insurance. It would also put pressure on wages, since employers would be trying to find the money to pay for the new taxes. And it would have the effect of raising the cost of health insurance - which is already too high - because workers and employers would have to earn more money to pay with after-tax money.

What does CWA think?

It’s a bad idea. A CWA study showed that a plan to tax all health benefits would have cost a typical CWA member as much as $48,000 in extra taxes over ten years. This is not the time to add an additional tax burden to working families. There are better ways to pay for health reform, including requiring all employers to pay their fair share and cutting extra payments to private insurance companies’ Medicare plans.