Tuesday, August 4, 2009

Taxing Employer Health Benefits Revisited

One of the provisions in the recent healthcare proposals that have attracted some Democratic and Republican support is the proposal to tax employer health benefits, which I wrote about previously. I saw an interesting article in the Washington Post last week on the subject.

It argued persuasively (in my opinion) that the benefits of taxing employer health benefits on reducing healthcare inflation have been overstated. The idea behind taxing the benefits is that people over consume because it’s not their own money. This follows the maxim “that rarely do we spend other people’s money as wisely as our own.” This is surely true in many areas of life, but I’m not sure it is in healthcare.

It seems strange that people would choose to spend the day at a doctor’s office getting tests, and preparing for surgery just because they’re not paying. Most people would rather watch tv, or hang out with friends. As Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees put it in the article, no one says “ I have great chemo coverage so I think I'm going to go get cancer.”

That doesn’t mean that we shouldn’t tax employer health benefits. I detailed in my last post on the topic about how taxing these benefits would be fairer to employees who have to buy coverage with after-tax dollars.

Taxing benefits might also do two other things. First it could make employees more cost-conscious with the type of plans they get. Maybe young workers only need a catastrophic plan and something that pays for basic tests, not a $15,000 plan. Having to pay taxes on that $15,000 plan could make them see the costs of it. This could have the effect of lowering health costs for business.

Second, it would also raise money to expand coverage to the uninsured. And if it taxed only plans of more than say $10,000 it would do so without hurting working class employees who get coverage at work.

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