"Repeal the Tax Exclusion for Employer-Sponsored Insurance to Transfer Health Care Spending Focus to Individuals"
That sentence (headline), which appears in a report Rep. Chip Roy (R‑TX) issued this week, is the wisest, most responsible sentence I have seen from a member of Congress in nearly 30 years of working for health reform.
Let me explain.
The worst thing Congress ever did in health care was to create the (second) federal income tax. Basically, ever since 1913, Congress has taxed compensation that employees receive in the form of cash but not compensation they receive in the form of employer-sponsored health insurance. In effect, the income tax penalizes workers if they want to control their own health insurance dollars and health care decisions.
This “tax exclusion” for employer-sponsored health insurance is the original sin of US health policy. It has wildly increased prices for health insurance and medical care while suppressing the quality of both. Just one example: it is the largest cause of the problem of preexisting conditions.
The exclusion is thus one mistake that launched a thousand others. In my latest book, I list just a sampling (one dozen) of the subsidy programs, regulations, and further tax provisions Congress has enacted in a series of unsuccessful attempts to correct the problems the tax exclusion creates.
Making health care better and more universal requires ending the tax exclusion. Ideally, Congress would do so by eliminating federal income and payroll taxes. But really, it should eliminate the exclusion by almost any means necessary.
Ending or even just reforming the exclusion is politically difficult, however. Inefficient health care providers, insurance companies, and large employers rely on the exclusion to protect them from the harsh judgments of consumers. The exclusion protects those companies by penalizing workers who do business with their competitors. There are a lot of those inefficient producers, and they spend a lot of money lobbying to preserve the special privileges the tax code grants them. Those special-interest groups successfully lobbied Congress to kill the Cadillac tax, for example, which was a rather measly effort to curtail some of the exclusion’s effects.
Roy (along with staffers Michael Davis and Sabrina Hancock) identifies the exclusion as the most important health care problem facing US consumers. It is the most important reason, they explain, why the “government controls more than 80% of health spending” in the United States and (not unrelated) why health care prices are higher than necessary.
Roy endorses changing the tax code to let workers control the $1 trillion of their earnings and health spending that the income tax and the tax exclusion currently require employees to let their employers control. (Phew, that was a mouthful.)
His proposal should have bipartisan appeal. While the appeal to Republicans is obvious, Roy’s proposal could also warm the cockles of Democratic hearts because it would end many of the inequities the exclusion creates. Such as:
- The implicit penalties the tax code imposes on workers without access to employer-sponsored coverage;
- Letting high-income executives control the health insurance choices of lower-income employees;
- Letting executives control a larger share of the earnings of women, older workers, workers with chronic conditions, and low-income workers;
- The inequitable impact that higher medical prices have on workers with low incomes and/or chronic conditions; and
- The “spouse tax,” a near-100 percent tax on thousands of dollars of compensation that spouses would otherwise receive in the form of health insurance.
To name just a few.
Roy’s proposal would also accomplish what the Cadillac tax could not: it would cap the exclusion for high-income earners, thereby shifting the burden of federal taxes up the income scale.
Democrats should take note.