Tax experts push for overhaul of health insurance tax benefits

The more than $150 billion spent on health insurance tax benefits does more harm than good, witnesses told a presidential panel studying tax reforms.



"It is such a bad subsidy. It's increasing the number of uninsured," said Eugene Steuerle, senior fellow at the Urban Institute. "It's one of the worst subsidies that we could possibly imagine."



Steuerle and Mark Pauly, a health care economics professor at the University of Pennsylvania, argued that tax breaks given to employers and employees for health insurance don't promote the spread of basic health insurance coverage.



Instead, the incentives cause people to buy excessive amounts of insurance to lower their taxes. That means costs increase, causing some employers to drop their health insurance coverage altogether.



Pauly said the incentives are "mistargeted." They lower taxes most for higher wage earners and increase the ranks of the uninsured.



"By most definitions of fairness, the patterns of distribution of these differences in their taxes would be regarded as highly unfair and inequitable," he said.



The panel's vice chairman, former Louisiana Sen. John Breaux, asked the experts for more information about the best ways to use tax laws to increase health insurance coverage among those who have none.



"It's the biggest problem, I think, in the country," Breaux said, also calling it "much more difficult that Social Security."



Census Bureau data show that about 45 million people lacked health insurance at some time during 2003.



The President's Advisory Panel on Federal Tax Reform plans to issue a report this summer with options to make the nation's tax laws fairer and simpler.



The panel explored the notions of fairness at its meeting Wednesday, probing not only health insurance but also benefits for low-wage workers, tax penalties for married couples and subsidies embedded in the tax system.



Steuerle estimated the subsidies for health insurance stand at $150 billion, projected to grow to $250 billion in several years.



Pauly calculated that those subsidies amount to more than $188 billion. They include tax breaks for employer provided health care, cafeteria plans, flexible spending plans and new health savings accounts.



Taxpayers can also take a deduction if they pay more than 7.5 percent of their income in a year for medical costs not reimbursed by insurance.



The result is that "the richest half get 75 percent of the subsidy. The poorest half make up 75 percent of the uninsured," Pauly said.



He pointed to his own Calvin Klein glasses, purchased with money set aside in a tax-free flexible spending account, as evidence of tax benefits accruing to those with the best coverage.



"I'm grateful to the U.S. Treasury for improving my appearance, but I would not put that high on the list of social priorities," he said.



Pauly recommended that the tax subsidies for health insurance coverage be limited and combined with a new refundable credit to help low-income and uninsured individuals and families buy coverage.



Steuerle warned that the country's mounting deficits and aging population could make it difficult to create a large, new credit without reducing tax benefits for someone else.



Tax advisers also cautioned the panel not to recommend a poorly designed system that tries to make the current income tax more like a consumption tax by adding new features like large, tax-free savings accounts.



Bob Greenstein, founder and executive director of the Center on Budget and Policy Priorities, called that approach "the worst of all worlds" because it would sap the potential for economic growth gained by a tax on spending and exacerbate the gap between rich and poor.



William Beach, director of the data analysis center at The Heritage Foundation, agreed the panel should avoid a poorly designed hybrid. "The motto is, tax all income once and at its source," he said.