By John O. Fox
Helping uninsured Americans acquire basic health coverage is an important presidential campaign issue. Not only are there an estimated 43 million uninsured, but premiums for those who do have insurance are rising at double-digit rates, employers are shifting an increasing share of the costs onto employees, and many people who used to work for companies that paid part of their insurance are now self-employed and have to foot the whole bill themselves. So both President Bush and Sen. John Kerry are promising to make coverage more affordable for the uninsured. But I bet you're wondering just where Congress is going to find the money to make this possible. Without the money, the candidates' promises are, let's face it, empty.
Bush proposes to spend $90 billion over the next 10 years to extend coverage to about 5 percent of the uninsured, but he has yet to tell us where the funds will come from. Kerry proposes to spend at least $650 billion over the same period to help about 60 percent of the uninsured, and expects to pay for it by rolling back the Bush tax breaks for the top 2 percent of taxpayers, an unlikely event if the Republicans retain control of Congress.
So let's get real. Want to know how to cover all of Bush's plan or make a significant down payment on Kerry's? Here's how: Congress could eliminate a tax break that for the last 50 years has irresponsibly subsidized deluxe health insurance policies, mostly for corporate management.
If tax relief for health insurance were limited to basic policies, the additional income tax revenues -- $15 billion in 2004 alone, according to a 2001 Congressional Budget Office estimate -- could go a long way toward covering the uninsured. Moreover, tax breaks for deluxe policies excessively drive up the cost of health insurance, and health care, for everyone. So curtailing this tax break is a winner for the great majority of Americans.
If you get any health benefits at work, you probably get this break: It means you don't have to pay income taxes on any health insurance premiums your company pays for you, or on money deducted from your wages to pay those premiums. Over the next five years, the exclusion for all workers may cost the government a whopping $600 billion, according to Congress's nonpartisan Joint Committee on Taxation. So Congress can't afford to be inefficient here.
Yet it has never limited the exemption to the cost of a basic policy -- i.e., one with a significant deductible, broad co-payments, limited coverage for a range of expenses and a separate premium for dental costs. Nor does it insist that the exclusion advance the goal of maximizing the number of insured ordinary workers. Instead, it goes along with arrangements that maximize coverage of executives and minimize coverage for all other workers.
For example, an employer might pay 100 percent of the cost of a deluxe plan (nominal deductible, modest co-payments and broad coverage, including a generous dental plan) for executives, all tax free, while paying only a small percentage -- or even none -- of the cost of a basic plan for all other employees. (The laws of some states may mandate that employers provide minimum coverage for a certain portion of workers.)
Take this simplified hypothetical. XYZ Inc. employs Mr. CEO and Ms. Receptionist, each married with two young children. Mr. CEO earns $250,000, Ms. Receptionist $25,000. XYZ pays for Mr. CEO's entire policy. While far less expensive policies are available, the company acquires a $2,000 per month deluxe policy for him and his family. That's $24,000 a year in untaxed income. Because Mr. CEO is in the top 35 percent bracket, his income tax savings this year alone amounts to $8,400 -- enough to cover all, or nearly all, of the cost of many basic plans.
Meanwhile, XYZ offers a much skimpier plan to Ms. Receptionist, in which it would pay 25 percent of a basic policy that costs $8,000 this year. It has a higher deductible, higher co-payments and more limited coverage than Mr. CEO's policy. If she acquires the policy, she will have to come up with $6,000 the company doesn't cover. This she can pay under the company's salary-reduction plan, which allows the entire $8,000 to be tax-free for her as well. In that case, her income tax savings will be $1,200 (the 15 percent tax that she and her husband, given their modest earnings, would have paid on the $8,000 had it been included in their income).
The tax subsidy here is upside down, as it nearly always is as a result of this exemption: It costs the government seven times more for Mr. CEO's policy than for Ms. Receptionist's; yet a CEO could comfortably buy his own policy without government assistance, or easily make do with less coverage, while a receptionist needs every bit of her tax savings, plus probably a good deal more, to afford her policy.
You might be wondering: Why shouldn't corporations be allowed to treat their executives as favorably as they want? They should -- but not on the federal government's tab. When taxpayers subsidize a program, the government has the right and responsibility to impose conditions that are in the public interest. In the case of tax breaks for health insurance, that interest is served only if the principal focus is on maximizing basic coverage for ordinary workers.
It isn't as if Congress always indulges executives this way. Indeed, sitting in the tax code next door to Section 106, the law I've been discussing, is Section 105, which determines when employers' reimbursement of their employees' out-of-pocket medical expenses will be tax-free.
Under Section 105, Congress mandates that any company plan to reimburse "highly-compensated individuals" (a group that includes the 25 percent of employees with the highest pay) for their medical expenses must offer the same reimbursement right to most of their ordinary, full-time employees. If the company president is entitled to a $3,000 reimbursement, so must the receptionist be. Otherwise, any excess reimbursement to the president will be taxable.
Why should the principles be any different for health insurance premiums?
The $8,400 saved by Mr. CEO far exceeds anything that Bush or Kerry thinks the government should spend on a family policy for the uninsured. The principal feature of Bush's initiative is a maximum annual insurance stipend that he expects will provide uninsured Americans with enough money to cover 90 percent of the cost of a basic policy. If a household consists of a husband, wife and two dependent children, that maximum stipend is $3,000. To guard against government excesses, Bush's plan reduces the subsidy if the family's income exceeds a modest $25,000, and he eliminates the subsidy altogether if their income exceeds $60,000.
Smaller sums would be available for smaller households. For example, the maximum annual stipend for a single person without dependents is a mere $1,000, and the figure declines if her income exceeds a piddling $15,000. When it comes to helping lower- and moderate-income households with their health insurance costs, Bush won't tolerate more than a minimal federal role.
Kerry's plan includes multiple features that expand Medicaid coverage, help small businesses cover their employees, and help the uninsured who are between 55 and 65 years old or are temporarily out of work. In every case, he contemplates assistance only for basic insurance coverage, such as is available under Medicaid or for federal workers.
Let's be clear: No one expects the government to help the uninsured acquire a deluxe plan. Indeed, subsidizing deluxe policies has negative economic consequences beyond the direct revenue cost to the government. Economists warn that the tax exemption for deluxe health insurance premiums induces many high-income workers to acquire more insurance than they would otherwise. While any tax break for health insurance premiums increases the cost of premiums -- workers buy more insurance, and insurance companies know they can charge more because the government is footing part of the bill -- the effect is magnified by the unlimited exclusion granted for deluxe policies. Furthermore, by providing full or nearly full insurance coverage for even the most minor medical problems, deluxe policies reduce the incentives of both the insured and their physicians to minimize the costs of medical care, and the effect trickles over to the price of all medical care.
Both Bush and Kerry, along with every candidate for Congress, will tell you that they abhor waste in government. They can do something about it. Let's find out if they will.
Incidentally, I'm hardly the first person to suggest capping the exclusion for employer-paid health insurance premiums. Twenty years ago, this exact recommendation was included in comprehensive recommendations to make the tax laws fairer and more economically sound -- recommendations made by Ronald Reagan's Treasury Department.
John Fox teaches a course on tax policy called "Winners and Losers" at Mount Holyoke College in South Hadley, Mass. His most recent book is 10 Tax Questions the Candidates Don't Want You to Ask.