The Association of U S West Retirees



Bush Plans to Seek Tax Break For Private Health Insurance
By John D. McKinnon
The Wall Street Journal
Sunday, January 21, 2007

WASHINGTON -- President Bush will propose a sweeping change in the way the government taxes health-care insurance, in an effort to make coverage cheaper and more widely available.

In his weekly radio address, Mr. Bush suggested he will seek to extend tax deductibility of health coverage to people who buy it outside the workplace -- especially to people who are self-employed or work without traditional benefits.  Currently, the government doesn't tax employer-provided health insurance benefits, but gives smaller breaks, or none at all, to people who buy insurance outside the workplace.

One way to eliminate the inequity "is to treat health insurance more like home ownership," Mr. Bush said.  "The current tax code encourages home ownership by allowing you to deduct the interest on your mortgage from your taxes.  We can reform the tax code, so that it provides a similar incentive for you to buy health insurance.  So in my State of the Union Address next Tuesday, I will propose a tax reform designed to help make basic private health insurance more affordable -- whether you get it through your job or on your own."

In its proposal, the administration will recommend a flat standard deduction for both self-purchased health insurance and for employer-provided coverage.  The level for a family would be $15,000, and for individuals it would be $7,500, someone close to the administration said over the weekend.  A family earning $60,000 would get a total tax savings of about $4,500 under the plan, this person said.  That includes $2,250 of income tax savings and an equal amount of savings from payroll taxes for Social Security and Medicare, which the deduction also could be used against under the administration plan.

Conservative economists believe the change would encourage many more people to buy health coverage, and would touch off intense competition in the insurance marketplace and thereby help hold down prices.  White House officials think the change also would encourage more people to switch to coverage with higher deductibles, in order to maximize their personal savings.  That could produce further downward pressure on costs, by giving consumers more incentive to purchase health care more carefully.  The average annual premium for employer-provided insurance for a family is around $11,500, but families can buy high-deductible coverage for themselves in the insurance market for an average of $5,200 -- little more than the amount a typical family could save on taxes under the administration plan.

Some people could even make money by acquiring health coverage.  For example, a single 30-year-old making $40,000 could buy coverage for as little as $1,000 a year and would get a tax break worth $2,250 for doing so.

In fact, officials believe many younger, healthy people who now don't buy coverage would do so, benefiting the insurance system as a whole.  "This is a huge incentive for the uninsured to get coverage," a senior administration official said.  "People currently buying policies on their own will get a big benefit that they've never had before.  And for many of the uninsured and underinsured, health insurance will finally be within reach."

Despite the plan's appeal, its effective cap on deductibility of employer-provided coverage will be controversial with some Democrats, who are focused on shoring up the troubled workplace system of insurance, and worry that the White House proposal would undermine it.

Many Republicans counter that the traditional unlimited tax break available for employer-provided care is actually part of the problem with the U.S. system, and contributes to overspending and rapid inflation in the health-care sector.  Mr. Bush said in his radio address that the tax code "unwisely encourages workers to choose overly expensive, gold-plated plans.  The result is that insurance premiums rise, and many Americans cannot afford the coverage they need."

The person close to the administration said 80% of people receiving employer-provided coverage would come out ahead financially under the plan, but 20% would be losers.  About 17 million people are buying health insurance themselves, and all of them would be winners under the plan.  Even the 40% or so of Americans who don't pay income tax could benefit from the break on payroll taxes, the person said.

Cracking the problem of health-care inflation is emerging as a major political issue for the foreseeable future, due to the persistent rapid rise in costs, employer efforts to shift more of the burden to workers, and the aging of the baby boomer generation.  Big corporations and insurers as well as labor unions are launching their own new efforts to find solutions.  Still, the odds of major legislation in the current Congress appear long, and health care is likely to be a big point of contention in the 2008 presidential race.  In the meantime, Republicans and Democrats are sharpening their arguments.

The new White House proposal bears strong resemblance to a plan put forward in 2005 by Mr. Bush's Advisory Panel on Federal Tax Reform.  It proposed capping the exclusion from income for employer-provided health care at $11,500 for families and $5,000 for singles.   The recommendation, which has languished with the tax panel's other reform proposals, came after witnesses told the tax panel the existing federal tax subsidies for health insurance were benefiting rich workers while raising insurance prices for the poor and increasing the number of uninsured.

The current policy of excluding health benefits from taxation is thought to be the most expensive single tax break the government provides.  According to the Advisory Panel on Federal Tax Reform, tax benefits associated with health care will cost approximately $141 billion, or 12% of all federal income tax revenue, for 2006.  The largest component of this cost is the employee exclusion for employer-provided health insurance and medical care, a tax expenditure of $126 billion.  The immediate budget impact of the White House plan weren't available, but the person close to the administration said the budget effects over 10 years would be nil.

Mr. Bush's health-care proposal will inject him into a debate that is heating up in a number of state capitols.  Most recently, California Governor Arnold Schwarzenegger announced a $12 billion plan to require uninsured Californians to carry insurance.  Mr. Bush said he would propose new efforts to support governors and state legislatures who are creating insurance pools to help reduce the numbers of uninsured.

--Henry Pullizzi contributed to this article.

Write to John D. McKinnon at