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National Debt

Health Care Tax: The What and Why

  • June 15, 2009

    Much has been made lately of a plan that may or may not be in the works (depends whom you ask) to pay for President Obama's ambitious universal health care plan. Most of the talk on the issue stems from the first question asked about it: How is it going to be paid for?

    One answer that has been floated but disavowed by all asked, is a health benefits tax.

    While this may sound like an increase in taxes that we already pay, it is both more and less complicated than that, at the same time.

    Health care provided by employers is something that came to be at a time when the government limited the salaries paid to employees. As a way to circumvent this restriction, companies began offering health coverage as an extra perk in addition to the limited salaries. This benefit managed to be included tax-free courtesy of the IRS and was therefor a way to increase an employee's total compensation while both staying within the confines of the law AND giving the increase at no tax expense to the employee. Instead of giving the employee an extra $2000 in salary and having them only get $1500 after taxes, employers could provide $2000 worth of health care coverage and the employee would receive the full benefit without any tax liability.

    What the health benefits tax seeks to do is bring some level of parity to the health insurance field that finds some people almost abusing the system by using their coverage almost excessively, since there is no incentive not to. For families which accrue more than $15,000 worth of premiums a year against their health care plans, a tax would need to be paid.

    This tax would have a two-fold purpose. One, when an item is taxed, it becomes used less frequently or only when necessary. Think of when gas shot up to over $4/ gallon; the level of traffic on holidays and holiday weekends declined dramatically but people still managed to get to emergency rooms. The same holds for tobacco taxes: the more it costs the less likely people are to use it.

    The second purpose would be to pay for the universal coverage plan, which has been estimated to cost over $100 billion, which a health benefits tax could pay for if administered as planned.

    It should be noted then that the government has historically done a poor job of implementing such plans and that, conversely, private industry has had much more success in both creating and managing such far reaching programs since they are more concerned about efficiency and sustainability than their counterparts in Washington.

    We expect the debate on this issue, as well as the actual value and shape of the universal health care program to be fiercely debated in the upcoming weeks and months, and encourage our readers to look for our analysis of the program shortly.


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