Federal Debt Negotiators Eye Limiting Health Insurance Tax Break

By and | July 11, 2011

Limiting the tax break for employer-provided health insurance became a bargaining chip on Friday in congressional negotiations to beat an Aug. 2 deadline for averting a U.S. default.

“Limiting the deduction for the higher income brackets is something that is on the table,” Representative Sandy Levin told Reuters. He is the senior Democrat on the tax-writing U.S. House Ways and Means Committee.

The employer-provided healthcare income exclusion cost about $117.3 billion this year. Limiting it could bring in considerably more new government revenues than other, smaller options that have been discussed by negotiators.

President Barack Obama and congressional leaders are trying to craft a deal to cut $4 trillion from budget deficits over 10 years to give lawmakers political cover to raise the government’s debt ceiling of $14.3 trillion.

The employer healthcare tax break allows employees to exclude from their taxable income the value of contributions toward employer-provided health insurance plans.

A cap could be politically feasible because it would not register as a tax increase. The initial pain would be minimal and those affected would be higher-income employees rather than the elderly or the poor, analysts said.

Eliminating or capping this tax break was discussed during debate over the 2010 healthcare reform act, but Congress instead put an excise tax on high cost “Cadillac” plans only. It take effects in 2018.

Health experts and economists have long seen reining in the healthcare tax exclusion as a way to control soaring healthcare costs. Advocates say individuals would respond to the higher costs that would result by choosing cheaper insurance plans.

Analysts would expect any change to take effect gradually, probably beginning after the November 2012 elections, with a cap set below the expected rate of rising healthcare costs.

In 2009, 58.5 percent of Americans got health insurance coverage through employers.

Investors may view potentially limiting the tax break as a negative for health insurers because without the incentive, more employers may stop offering coverage.

“The general consensus of non-elected people who pay attention to this is that that’s really the way to go. You’ve got to ease yourself into something like this,” said Joseph Antos, a healthcare policy expert at the conservative American Enterprise Institute.

Levin said that removing the break too quickly could upset last year’s landmark health reform law.

“Those provisions are essential to healthcare reform. So you have to be very, very careful,” he said.

(Additional reporting by Andy Sullivan and Kevin Drawbaugh, with Lewis Krauskopf in New York; Editing by Howard Goller)

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