During a more tranquil time in Washington, 1999, a pair of odd political bedfellows — former House Majority Leader Dick Armey (R.-Tex.) and Rep. Pete Stark (D.-Calif.) — co-authored an opinion piece in The Washington Post in which they proposed a way to make health insurance more affordable and available.
At issue, then as now, is the way the federal government subsidizes the purchase of private health coverage. For decades, employees have been able to exclude an unlimited amount of health benefits from their income (thereby avoiding the tax on that income), but only so long as that coverage comes from their employers. This one tax provision gradually spawned an entire industry, with employer-provided plans now covering 160 million Americans and bestowing an average tax subsidy of $2,778 on each covered employee. In 2006, its total value was estimated to exceed $206 billion.
The problem is that Uncle Sam plays favorites. If your employer doesn’t offer coverage, or if you don’t like the plan selected for you, tough: You must pay for your policy with your own after-tax dollars. The exclusion, moreover, is unfair. “The highly paid CEO gets a more lavish health-care tax break,” Armey and Stark noted, “than the waitress earning the minimum wage.”
The employer-based system also encourages companies to spend more on health insurance than is necessary. Overly generous policies encourage consumers to over-use medical services, fueling rampant health-care inflation.
To Armey and Stark, the solution was obvious: Use the tax code to help increase coverage. “We think Congress should create a new refundable tax credit to enable all Americans to buy decent health coverage.” Other liberals agreed. Sen. Barbara Boxer (D.-Calif.), and Reps. Barney Frank (D.-Mass.) and Jim McDermott (D.-Wash.) sponsored legislation creating tax credits or deductions for individuals to purchase health coverage.
Fast forward to this year’s State of the Union address. President Bush unveiled an ambitious proposal to shrink the ranks of the uninsured by replacing the exclusion for employer-provided coverage with a new standard deduction for the purchase of health insurance. The deduction would be set at $7,500 for individuals and $15,000 for families and indexed to inflation. Consumers could claim the entire deduction no matter how much, or little, they actually spent on their plan. Spend more, and you would pay tax on the excess amount. Spend less, and you would pocket the difference. For the first time, every American, including the 82 percent of the uninsured who work or live in households with a worker, could claim some tax relief for their health coverage.
Bush believes limiting the tax-free status of the health insurance will lead employers to disclose health costs to employees and encourage workers to demand better value for their money, as they do when buying a car or negotiating a mortgage. Greater consumer pressure on the health industry would restrain the growth in costs.
The second part of Bush’s plan focuses on the millions of uninsured Americans with incomes so low that they pay little or no taxes. According to the nonpartisan Tax Foundation, over 50% of the uninsured paid no income tax in 2004 (the most recent data available) and two-thirds paid less than $1,000. Because a tax deduction would offer little help to them, Bush wants to make other federal health programs more flexible so that they complement, rather than hinder, state reform efforts.
For instance, instead of sending billions to hospital emergency rooms and other providers to treat the uninsured after they get sick (the current practice), states could use the funds to help the poor obtain the sort of private coverage available to the rest of us.
Because family coverage costs about $11,000 annually, the $15,000 cap Bush proposes is quite generous. In fact, 80 percent of mostly lower-wage workers would see their taxes fall under the plan.
Among conservatives, the president’s plan won plaudits. But liberals rejected his bid for a bipartisan solution. Stark refused to even hold hearings on it in the health subcommittee he chairs, saying the plan was “designed for disaster.” Rep. Charles Rangel (D.-N.Y.), dismissed it as “a dangerous policy that … shifts cost and risk from employers to employees.”
This knee-jerk opposition prompted some journalists to scold Democrats. The Post’s Steve Pearlstein noted that the plan “actually involves raising taxes on the rich and lavishly insured and giving the money to the working poor and the uninsured. Given that, you’d think Democrats would have welcomed a politically courageous proposal to put a cap on one of the biggest and most regressive features of the individual income-tax code.” Instead, “they’ve shifted reflexively into partisan attack mode, mischaracterizing the impacts of the proposal and shamelessly parroting the propaganda from the labor dinosaurs at the AFL-CIO.”