Tax to Fund U.S. Health Plan May Cut Employer-Provided Benefits

By Ryan J. Donmoyer

June 25 (Bloomberg) -- Zappos.com’s warehouse and customer-service workers are paid $10 to $11 an hour and get health benefits worth about $7,500 a year.

Lawmakers led by Senator Max Baucus are talking about slapping a $495 tax on some of those covered by the medical plan to help pay for extending coverage to some of the 46 million Americans who lack it.

Under the funding proposal being considered by the Senate Finance Committee, the tax for Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., would be about $9,600, based on the $40,543 value of his health insurance last year.

Baucus, 67, the chairman of the Senate Finance Committee, says the best way to pay for a $1 trillion overhaul of American medical care would be to tax health benefits provided by employers that are more generous than those offered to federal workers -- including lawmakers like him. The government benefits are worth $4,200 for individuals and $13,000 for families.

While President Barack Obama hasn’t embraced a specific funding proposal, the congressional Joint Committee on Taxation says the levy would generate as much as $418.5 billion.

Yesterday, Baucus and Senate Budget Committee Chairman Kent Conrad of North Dakota, a Democrat, said a bill being drafted by the panel would contain the tax.

‘Package That Is Paid For’

“It is hard for me to see how you can have a package that is paid for that does not reduce the subsidy” on employer-paid benefits, said Conrad, 61.

At Zappos, based in Henderson, Nevada, a new tax would likely force the company to offer a less generous plan to its workers, says spokeswoman Rebecca Ratner.

“Our primary business is made up of call-center or warehouse employees,” Ratner said. “For income at that level, adding any taxable additional burden is something that is a big impact. We’d offer a second-tier plan if taxable benefits were a concern for them.”

The Goldman and Zappos examples highlight the political risk for Obama as he seeks to push through the $1 trillion overhaul of a sector that accounts for almost 18 percent of the economy. While the higher cost to top earners such as Blankfein probably wouldn’t meet much popular resistance, any measure affecting lower-income workers such as call-center operators for Zappos would likely be controversial.

Blankfein’s Benefits

Blankfein wouldn’t comment on the tax proposal, said Andrea Rachman, a spokeswoman for New York-based Goldman, the fifth-biggest U.S. bank by assets. The value of his health insurance was disclosed in the company’s proxy statement. Bloomberg News calculated his potential tax burden assuming the proposal would force him to consider $27,543 of his health benefit as additional income taxed at the top marginal rate of 35 percent.

Raising taxes on Zappos employees -- and up to 40 percent of Americans who receive health benefits from their employer -- would bring in about $418 billion over 10 years, according to the joint taxation panel. It would clash with the president’s pledge to avoid raising taxes on the 95 percent of Americans who earn less than $250,000.

Another proposal floated by Baucus and under consideration by his panel would limit the tax on health benefits to individuals earning more than $100,000 and families with income of more than $200,000. The plan, which is more in line with Obama’s vow, would raise only $162 billion. That’s less than 20 percent of the projected cost of the overhaul, which the president said at a news conference June 23 “will be paid for.”

‘Gold-Plated Plans’

Obama’s “pledge to hike taxes only on the ‘rich,’ coupled with concerns from unions and others that a cap will pinch more than just those with the gold-plated plans, will pose a political challenge for lawmakers,” Alex Brill, a scholar at the Washington-based American Enterprise Institute, said in an e-mail. He was an adviser to former Republican Representative Bill Thomas of California, who was chairman of the tax-writing House Ways and Means Committee until 2007.

Obama, 47, has asked Congress to finish work by Oct. 1 on the largest proposed expansion of government involvement in U.S. health care since Medicare was created in 1965. Five congressional committees are drafting versions of the legislation that has to be adopted by both the House and Senate.

Employers have long been able to deduct the cost of insurance they provide employees, who in turn don’t count the benefit as income when they calculate their liability. The arrangement is the biggest U.S. tax subsidy and will save workers $142 billion this year, according to an analysis by the White House.

Higher-Income Workers

Advocates of taxing health benefits such as Baucus, a Montana Democrat, said the subsidy disproportionately benefits higher-income workers who avoid higher tax rates. They said it also encourages employers to offer overly generous benefits that drive up medical costs by covering elective or unnecessary health procedures.

Baucus, who drafted the plan containing the funding proposals, said May 18 that any overhaul should “begin to slow the rapid increases in health-care costs that take up more and more of the budget for American families and businesses.”

Obama has countered proposals to tax health benefits with a recommendation that Congress pay for the overhaul by limiting deductions overall for high-income people. Still, the president said in an interview this month with Bloomberg News that he wouldn’t rule out a benefits tax.

‘Best Way’

“I don’t want to predetermine the best way to do this,” he said June 16.

The Center on Budget and Policy Priorities, a Washington research group advising Congress on the issue, estimates that as much as 40 percent of company-provided plans exceed the federal threshold. While many of these policies are worth only a few hundred dollars more than the U.S. baseline for families, workers with benefits like those at Zappos could see their taxes increase by hundreds, if not thousands, of dollars.

An employee at a company who pays in the 25 percent tax bracket and has employer-provided benefits worth $15,000 plus $2,000 in vision and dental benefits would pay an extra $1,000 per year. Proposals to impose a cap on untaxed benefits may also end perks such as Flexible Spending Accounts, Health Savings Accounts and similar devices for purchasing health care with pretax dollars, Baucus has said.

‘Make People Whole’

For those who may be affected, the question remains who would pay the higher tax bill, said Clint Stretch, a principal in the Washington office of Deloitte Tax LLP. Even employers who view fringe benefits as a recruitment tool probably won’t increase pay to cover the tax, he said. “I think there would be a reluctance in the employer community to make people whole.”

America’s Health Insurance Plans a Washington trade group, is “taking a close look at” the implications of a cap and would oppose it if it resulted in less employer-based coverage, said spokesman Robert Zirkelbach. “We believe we should build on the employer-based system.”

Proposals to tax employee benefits would have “extremely negative reverberations in the economy,” said Randy Johnson, senior vice president of labor, immigration and employee benefits at the U.S. Chamber of Commerce.

Trying to limit the number of people affected, he said, would create “an administrative nightmare for employers and a recipe for bad health policy.”

Easier Access

Those who could face higher tax burdens in the short-term would benefit from savings in the broader system and easier access to health insurance during jobless periods, according to Robert Greenstein, executive director of the Center on Budget and Policy Priorities in Washington.

“It might cost them more upfront” in taxes, Greenstein said. “Over an extended period of time, their insurance will cost a little less.”

For many workers, the proposal may have no tax impact at all: About two-thirds of employees receiving company-provided benefits wouldn’t be affected. In addition, Baucus has proposed to exempt health benefits secured in collective-bargaining agreements, such as those with labor unions. Furthermore, Greenstein said lawmakers are considering placing the cap higher so that only 20 percent or 25 percent of those with company-provided health plans would pay tax.

“We’re talking about the large majority of workers with employer-based coverage not being subject to the tax,” Greenstein said.

Obama may not face much of a backlash if he is able to push through an overhaul of health care, even if it means lower-income workers such as those at Zappos end up paying more taxes, said Henry Aaron, a senior fellow in economic studies at the Brookings Institution, a Washington research organization.

“If he wins on health, he wins, full-stop,” Aaron says. “All else will be forgiven.”

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net .

Last Updated: June 25, 2009 00:01 EDT

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