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Commentary

Health and Taxes
Wall Street Journal, 1-24-07

In his State of the Union address, President Bush proposed to level the "paying" field between Americans who get health insurance through their employers (a benefit that is tax–free) and those who do not, and who must purchase insurance on the open market with after–tax dollars.

For all the griping about our system, Americans have the most advanced health care in the world in part because we still have something resembling a private market for insurance. But it is not a truly efficient market because current tax policy lets businesses—but not individuals—deduct the cost of health expenditures. Thus most Americans with private insurance get it from their employers, which leads to inequities and insulates individuals from the real cost of their treatment decisions.

Mr. Bush's "standard deduction" for health care would move in the direction of solving both problems. Instead of giving employers an unlimited deduction and individuals none, Mr. Bush would give every family a $15,000 deduction ($7,500 for individuals) regardless of their insurance source.

That might mean a slight tax increase for those who currently have the most expensive insurance plans. But the average employer-sponsored family plan runs about $11,500 annually, and about 80% of the 160 million employer–insured Americans would benefit. All Americans with employer–sponsored insurance would have to report the value of their health benefit as income, but they could deduct the full $15,000 no matter how much their insurance cost.

The 17 million Americans who buy their own coverage would be big winners. And because the tax deduction would apply to payroll as well as income taxes, the benefits would be large even for low–income earners. So a family making $60,000 would wind up with a tax savings of $4,500, which would offset the cost of acquiring coverage in many states. Meanwhile, a young person making $40,000 could buy a high–deductible plan for, say, $1,000 and actually get a tax break of $2,250 for doing so. The Treasury estimates the new deduction would add at least five million Americans to the ranks of the insured, but our guess is that would be higher given the incentives all of this would provide for new private insurance products...

But the biggest problem with Mr. Bush's plan is that it wasn't offered two years ago, when it had a better chance to pass. The White House wasted its first term health energies on a failed attempt to buy votes with the Medicare drug benefit. Now the GOP is a minority in Congress, and Democrats aren't likely to favor Mr. Bush's ideas because they think health care is a winner for them in 2008.

The President's proposal has been greeted with great skepticism in Congress, but with wider support in the policy community and among editorial boards. Both reactions are unsurprising. The former reaction is to be expected because Democrats will be loath to embrace any Republican health reform, no matter how sensible, with the 2008 presidential elections just around the corner.

The latter reaction is also understandable—since capping the tax deduction for health insurance is a bipartisan idea that has been floated for decades. For more reaction to the President's plan, go here:

A Good Start On Health Care Reform Investor's Business Daily, 1-22-07

State of Troubles Washington Post, 1-24-07

Bush's better health-care policy Washington Times, 1-24-07

Bipartisan Cooperation on Health Care is Dead on Arrival Steven Pearlstein, Washington Post, 1-24-07



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