Sept. 14 (Bloomberg) -- President Barack Obama is asking lawmakers to tax the health-insurance benefits of top earners, stirring opposition from congressional Democrats who fought a similar proposal in the 2010 health-care law.
The provision, tucked deep inside the 155-page jobs legislation Obama submitted to Congress on Sept. 12, would make health plans provided by employers partially taxable for couples earning more than $250,000 a year and individuals earning more than $200,000.
For these taxpayers, the proposal is a dramatic departure from their current tax treatment, in which all their health benefits are exempt from taxation. It also revives a debate among Democrats over whether taxing health-insurance plans for the wealthy sets the stage for one day expanding the tax to lower-income brackets.
“To a large degree, we’ve visited that, and we already -- in health care reform -- did some of that,” said Senator Robert Menendez, a New Jersey Democrat and Finance Committee member who said he would rather focus on higher taxes for big oil companies than reopen the issue of taxing health benefits.
The resistance from Obama’s fellow Democrats indicates the president’s plan may not survive intact, as leaders of the Republican-controlled House have said they oppose other tax provisions intended to offset the cost of cutting payroll tax rates and spending on infrastructure, schools and aid to states.
Senator Richard Durbin of Illinois, the chamber’s No. 2 Democrat, said the caucus isn’t united behind Obama’s proposals to cover the bill’s $447 billion cost. Some Democrats would again oppose taxing some health plans, he said.
House Democrats last year forced revisions to a tax on high-value insurance plans that was included in the health-care law. Labor unions, which have fought to increase benefits for members as companies resisted wage increases, objected to the levy and pushed successfully to increase the threshold and delay implementation.
Starting in 2018, a 40 percent tax will be levied on plans worth more than $10,200 for individuals and $27,500 for families. The tax will be paid by insurance companies, though opponents argue that costs will be passed on to consumers.
Bush Tax Cuts
The insurance proposal included in the jobs package would affect taxpayers in the top brackets starting in 2013. That year, under the administration’s assumption that lower tax rates for high earners passed under President George W. Bush are allowed to expire, someone in the 36 percent bracket with a $10,000 health-insurance policy would be required to pay an additional $800. Someone in the 39.6 percent bracket with a $20,000 policy would pay an extra $2,320.
Obama didn’t mention the health-care proposal during a trip to Ohio yesterday to promote the jobs package. The administration’s summary doesn’t specifically mention it, and the administration hasn’t promoted the policy rationale.
“This administration that tries to boast about how transparent it is certainly did not make clear” that it was proposing to tax health insurance, said Senator Orrin Hatch of Utah, the top Republican on the Finance Committee, at a panel hearing today.
Hatch said the administration’s position was “odd” given that it ran campaign ads in 2008 criticizing a proposal from Republican candidate John McCain that included taxation of health insurance.
An administration official, speaking on condition of anonymity, said there was no comparison between taxing plans for the highest earners and the earlier debate over taxing high-value, so-called Cadillac, health plans. The official, who wasn’t authorized to speak on the record about the proposal, said it targets high-income taxpayers who get a greater benefit from the current tax structure than do middle-income workers.
The official declined to comment on objections being raised by Democrats.
Senator Barbara Mikulski, a Maryland Democrat whose state includes some of the wealthiest counties in the U.S., said she didn’t support the health-care tax.
“I disagree with the president,” she said.
The proposal, she said, would be problematic for people with fluctuating incomes. Some of her constituents “might make one year $300,000 and the next year $30,000,” she said.
Representative Richard Neal, a Massachusetts Democrat on the Ways and Means panel, said “there is great skepticism” among party lawmakers about the ways Obama has proposed to pay for the jobs bill. He called the offsets “talking points.”
Representative Joe Courtney, a Connecticut Democrat, was one of the staunchest opponents in the House to the administration’s proposal to tax health-insurance plans based on the size of their premiums. He said yesterday that the administration’s focus on income thresholds is better.
“To the extent that it’s limited to the highest of incomes, I think you could make some argument that that’s really not threatening employment-based benefits as a public policy,” he said. “This one is not really targeted at scope of benefits as much as it is means testing.”
Compared with the tax on high-cost plans included in the health-care overhaul, the new administration proposal would do less to encourage insurers and employers to rein in health-care costs, said Paul van de Water, a senior fellow at the Center on Budget and Policy Priorities, a Washington-based group that advocates for low-income people.
“Its effect will be much more focused simply on raising taxes on upper-income people rather than changing behavior,” he said. “That’s not a bad thing.”
The health-care provision is part of a broader proposal from the administration to cap at 28 percent itemized deductions as well as limit other deductions, such as moving expenses, and some exclusions for high-income taxpayers. Interest earned on municipal bonds by wealthy individuals would be subject to the 28 percent threshold.
Capping the range of deductions and exclusions would generate about $400 billion in revenue over a decade, according to the administration’s estimates. Obama would also find revenue by taxing the carried interest, or profits-based compensation, of private equity managers, real estate investors and venture capitalists as ordinary income, instead of more lightly taxed capital gains.
Obama’s chief spokesman, Jay Carney, said yesterday the special 12-member congressional panel charged with cutting $1.5 trillion from the nation’s long-term deficit can modify the administration proposals, as long as the measures aimed at stimulating hiring are offset. The president wouldn’t veto legislation that enacted only part of his plan, he said.
Obama Would Sign
“He would sign it, and then he would return to press the Congress to get the rest of the job done,” Carney said.
Representative Rob Andrews, a New Jersey Democrat, said the health-care provision was “one of the least objectionable among a bunch of bad ideas.”
“I don’t relish anyone paying more or having to deduct less,” he said. “But given the fact that we’re borrowing 40 cents of every dollar we’re spending, and we need money to pay for this jobs bill, I think that’s a plausible and credible idea.”
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