Unions’ Health Benefits May Avoid Tax Under Proposal (Update1)

By Ryan J. Donmoyer and Holly Rosenkrantz

June 26 (Bloomberg) -- The U.S. Senate proposal to impose taxes for the first time on “gold-plated” health plans may bypass generous employee benefits negotiated by unions.

Senate Finance Committee Chairman Max Baucus, the chief congressional advocate of taxing some employer-provided benefits to help pay for an overhaul of the U.S. health system, says any change should exempt perks secured in existing collective- bargaining agreements, which can be in place for as long as five years.

The exception, which could make the proposal more politically palatable to Democrats from heavily unionized states such as Michigan, is adding controversy to an already contentious debate. It would shield the 12.4 percent of American workers who belong to unions from being taxed while exposing some other middle-income workers to the levy.

“I can’t think of any other aspect of the individual income tax that treats benefits of different people differently because of who they work for,” said Chris Edwards, director of tax policy studies at the Cato Institute, a Washington research group that often criticizes Democrats’ economic proposals. Edwards said the carve-out “smacks of political favoritism.”

Baucus, a Montana Democrat, is proposing to tax Americans whose health insurance is valued at a higher rate than what is offered to federal employees. About 40 percent of insured Americans have costlier benefits, and Baucus has said he is trying to set the level at which taxes would be imposed high enough so fewer people are affected.

‘Gold-Plated’ Plans

The policy is aimed at so-called “gold-plated” plans such as the $40,543 in health benefits paid to Lloyd Blankfein, chief executive of New York-based Goldman Sachs Group Inc., the fifth largest U.S. bank by assets.

It can also affect companies such as Henderson, Nevada- based Zappos.com, where workers’ $11 per hour pay is supplemented by employer-paid health insurance plans worth about $7,500. Federal workers’ health benefits are worth about $4,200 for individuals and $13,000 for families.

Lawmakers are crafting legislation aimed at meeting Obama’s goal of bringing down the cost of health care and expanding coverage to the 46 million Americans who lack insurance. Obama wants Democratic congressional leaders to seek Republican support, and to send him legislation by mid-October.

Baucus said yesterday the cost of health-care options his panel is considering can be cut to $1 trillion over 10 years and won’t add to the deficit, citing the Congressional Budget Office.

Cost Estimates

The non-partisan budget office last week delivered an informal cost estimate of $1.6 trillion for the legislation to overhaul the health-care system, sparking protests from both Republicans and Democrats and prompting Baucus to say his panel may delay consideration of a bill until next month.

“CBO now tells us we have options that would enable us to write a $1 trillion bill, fully paid for,” Baucus, who set that amount as his goal, told reporters at the Capitol.

The panel’s legislation must be joined with competing proposals from other Senate and House committees and forged into a single bill subject to negotiation and approval by both chambers before it can be sent to Obama.

Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said earlier this week that senators are coalescing around the idea of taxing some employer-provided benefits. Baucus said the details are still being negotiated, including how high to set the tax-free exclusion and when any changes would take effect, and whether to exempt union employees until their current contracts expire.

Cutting ‘Subsidy’

“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, Conrad said.

Kentucky Senator Mitch McConnell, the top-ranking Republican in the chamber, said today he has “serious reservations about capping the exclusion, particularly if they have a carve-out for union members,” according to his communications director, Don Stewart. Stewart taped McConnell’s comments and provided excerpts to a reporter.

Stewart said McConnell, discussing the prospect of a tax on some employer-provided benefits, said “table-pounding opposition” would result “if it were to exclude union members.”

Gerald Shea, an AFL-CIO official lobbying for health-care reform, said grandfathering benefits negotiated in a collective bargaining agreement is a “common thing when there is a big change in federal law.”

‘Expectations Are Set’

“Once a collective bargaining agreement is set, employer’s budgets are set, workers expectations are set. It doesn’t make sense to go back in the middle of the contract and change it,” he said.

Union groups and workers said Congress shouldn’t target contractually negotiated benefits.

Anna Burger, secretary-treasurer of the Service Employees International Union, said in an interview that workers have often traded salary increases for better benefits in agreements.

Taxes “shouldn’t be taken from the backs of workers who have bargained away wages and other things for their benefits over the years,” Burger said.

Sandra Carter, a retired Pacific Bell Telephone Co. technician from Stockton, California, said her health benefits, worth about $12,000 per year, were negotiated by the Communications Workers of America. She is unmarried with no children, meaning her individual coverage exceeds benefits paid to federal workers by about $7,800. If that amount were taxed at the 15 percent marginal rate, she would owe $1,170.

“I can’t afford the taxes I pay now,” said Carter, who said she suffers from diabetes. “Why should I get taxed on a benefit that keeps me a functioning person?”

Union Opposition

Other unions say they’re opposed to a tax on some employer- provided benefits, regardless of whether collective bargaining agreements are exempt.

“Either way, we are against a tax on health-care benefits in whatever form it takes,” said Jacob Hay, spokesman for the Laborers’ International Union of North America. The union represents 500,000 workers, largely in the construction industry.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net Holly Rosenkrantz in Washington at hrosenkrantz@bloomberg.net

Last Updated: June 26, 2009 15:13 EDT

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