May 19, 2009 10:35AM

On Taxing Employer Health Benefits

Democrats in Congress are reportedly considering taxing employer‐​provided health insurance benefits as a way to pay for their health care reform plan. And, even though he brutally attacked John McCain for something similar (see below) during the campaign, President Obama may now go along with the idea.

Much of the media coverage around the idea has equated this tax hike with the McCain plan and other proposals by advocates of market‐​based health reform over the years that would shift the tax break from employer‐​provided insurance to individual insurance. However, there is an important distinction. The market‐​based proposals would have taxed employer‐​provided health benefits (treating them as taxable compensation), but would have provided workers with a deduction or credit for purchasing insurance regardless of whether they receive it through work or pay it on their own. The result, for all but a handful of workers with the most expensive gold‐​plated employer plans, would have been tax neutral. In fact, many workers would receive a net tax cut. The shift in tax treatment was simply part of a larger strategy to move from a system of employer‐​provided insurance to one where health insurance was personal, portable, and owned by workers.

The plan being discussed by Congress, on the hand, is simply a tax hike. It is not revenue neutral—it is a $1 trillion tax increase that will fall heavily on the middle‐​class. It is designed not to change the system, but simply to raise revenue. 

That’s a very different thing!