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Taxing Health Benefits

Marc Tracy bizbox.slate.com

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June 23, 2009

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As a follow-up to last's Friday post on health-care reform and small businesses, we thought we'd note that as a bill is actually lodged, it looks likely that a major source of the (major) funding will come from a tax on...employer-sponsored benefits. Specifically, the Washington Post reports, Sen. Max Baucus (D-Mont.), who chairs the crucial Finance Committee, is planning on taxing employer-provided benefits that exceed the $13,000 annual value of federal-employee benefits in order to help fund his legislation. (Benefits that are lower than or equal to federal-employee health benefits would remain tax-free.) This change would definitely hit some small business owners, and discourage others from offering or continuing to offer generous or any benefits (which in turn would create a hiring disadvantage for them).

Actually, what really set off our alarms is that Baucus is likely to make an exception for employer-provided benefits that exist as a result of agreements with unions. While there is certainly a logic to this exception, we can't help but worry that the practical effect of this would be to continue to allow big corporations--which, after all, are much more likely to have unionized workforces--to offer generous tax-free benefits.

So we're of two minds. The report we discussed last week is clear: effective health-care reform will, over several years/a decade/several decades, save small businesses hundreds of billions of dollars (and, if costs can be brought under control, it will save the American people trillions). However, in the short-term, such a plan would require many new billions in funding; and, at a time of heavy government borrowing and the need for continued government spending, some sort of tax does seem to be the logical way to raise those funds.

In fact, the tax on employer-provided benefits enjoys intellectually honest support across the political spectrum: here, for example, is liberal ex-Secretary of Labor Robert Reich advocating it; and, as he mentions, the idea was supported during the presidential campaign by none other than Republican nominee Sen. John McCain (R-Az.). Current budget director Peter Orszag has said the Obama administration is open to the tax.

A tax on employer-provided benefits that are over a certain level does not strike us as a dealbreaker, in other words. However, its inclusion would make it all the more important that any final plan address and help to rectify the unique disadvantages faced by small businesses in any health-care system that continues to be dominated by employer-provided insurance.

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