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WHITHER HEALTH INSURANCE TAX?

January 23, 2007

UPDATED

President Bush is expected to propose a dramatic change in taxation of health insurance in his State of the Union address. The plan is probably dead on arrival, as the new Congressional Majority will stick by its one guiding principle: opposition to Satan George Bush and all of his works. It's a pity, because the proposals actually make a lot of sense. From what I understand from media reports, the plan works like this:

- Starting in 2009, employer health insurance will no longer be a tax-free fringe benefit, and employer paid health insurance will be included in W-2 income.

- Individuals will be granted a standard personal above-the-line deduction for health insurance of up to $7,500 annually for single coverage and $15,000 for family coverage.

- Money would be redirected to new grant programs to states to develop programs to cover the uninsured.

- In order to qualify for funds, states would have to open their insurance markets to out-of-state carriers and drop coverage mandates that require insurers to cover, for example, mental health treatment.

This would sever the link between employment and tax benefits for health coverage. It would also make it possible for people in a number of states (New York, for example) to buy the kind of insurance they need, rather than the kind the state legislature makes them buy.

These are the kinds of reforms that could make the market for health insurance much like that for other kinds of insurance. Had it been introduced when President Bush was popular, it might have even had a chance.

Unfortunately, political silly season is upon us, and the opportunistic opposition will block any plan that doesn't implement their real heart's desire: nationalization of the health care industry, with its inevitable calamitous results for health care quality and costs.

Links:

Washington Post

Reuters

Tax Prof roundup

UPDATE: It's a "standard" deduction, not an actual deduction. You'd get a $15,000 per-person deduction regardless of how much your health care expense is.

This is bolder than I had guessed. There would no longer really be a health-insurance deduction. Your real taxable income would depend entirely on how much your health insurance costs. The tax law would no longer help subsidize more costly insurance. In the unlikely event that the plan is adopted, it could do a lot to make taxpayers more sensitive to health care costs and premiums and to encourage high-deductible policies.

UPDATE: 1/24: Reaction to the proposal.

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