The AP is reporting that during his meeting with the President, Sen. Max Baucus (D-MT) will make the case for taxing employer-sponsored health care benefits as a way to finance reform:

Baucus says the tax-free benefit packages Americans now enjoy are a big factor in the high costs of the country’s health care system, because they provide workers free or low-cost access to too many health care services.

Indeed, the exclusion of employer-based health insurance from income or payroll taxes has contributed to rising health care costs. Since compensating an employee with cash is taxed, but compensating with health care benefits is not, the employer has an incentive to shift compensation toward health insurance (or another kind of benefit). Under this arrangement employees are desensitized to the true cost of health care coverage and higher-income Americans — those who need the least help paying for health coverage — benefit most. Workers in a lower tax bracket “receive a smaller tax benefit from the exclusion.” From the Center on Budget and Policy Priorities’ new report:

Democrats don’t want to get rid of the exclusion all together — as Sen. John McCain had proposed during the campaign — but some are considering limiting or capping the subsidy to raise some of the revenue needed to pay for health care reform and make the tax system more progressive. Below are some of the options currently under consideration:

- Limit based on the actuarial value of the plan: The employee will have to pay taxes for health care plans that exceed the actuarial value (i.e. the entire value of the plan) of a certain benchmark plan (the Senate Finance Committee suggests that initially, the standard option in the Federal Employee Health Benefit Program could be used as the benchmark). The taxes would only be paid on the difference, not the entire value of the expensive plan.

- Limit based on the income of the insured: Employees who earn a gross-adjusted income in excess of a certain amount (i.e. $200,000) would no longer be able to exclude their health care benefits from income and payroll taxes.

- Limit based on both the value of the plan and the income of the insured: An employee who earns in excess of $200,000 and has a plan that is above the value of a standard package would have to pay taxes on the difference of the value of the expensive plan and the benchmark plan.

Limiting the tax exclusion rather than abandoning it entirely (as McCain tried to do) has the benefit of preserving the employer-based system. Employers, after all, are fairly good at pooling risk — they have a good mix of healthy and sick people — and most employees like the coverage they currently receive. Maintaining the employer’s role also preserves the employer contribution to health care benefits, protecting the government or the individual from suddenly paying far more for coverage.

Most of the media reports have characterized modifying the tax treatment of employer-provided coverage as politically problematic for the administration, which harshly criticized McCain for taxing the full value of employer-sponsored benefits. But while McCain proposed eliminating the exclusion entirely, and thus blowing-up the employer market, Obama is proposing changes at the margin. McCain would have ended the employer’s role; Democrats are considering improving it.

This morning, during an interview with Sen. Chuck Grassley (R-IA), Fox News anchor Megyn Kelly argued that Americans don’t want to pay higher taxes for universal health care coverage:

We get emails from our viewers all the time. They don’t want higher taxes! They don’t want any more. They don’t want you to tax their health care benefits. They don’t want a Value Added Tax, a sales tax on their goods. Universal health care sounds good in theory but they don’t want to be taxed even more than they already are.

Watch it:

As Peter Orszag and a good number of bloggers explained, “health reform is the best chance to put costs on a sustainable path over the long term. But over the short term, it takes money. And there’s no clear congressional consensus over where to find the money.” But Americans are more willing to finance health care reform through higher taxation than Megyn Kelly suggests. The most recent polling shows that 47 percent “prefer a health care reform plan that raises taxes in order to provide health insurance to all Americans”; 47 percent do not.

Matt Yglesias is right to suggest that “the problem is that even if you have a senator who’s willing to raise taxes in the face of 47-47 public opinion, you have an additional hurdle when the subject turns to any particular tax,” but I would also argue that most Americans would be willing to pay higher taxes for health care security. Pay a little more for your beer and protect yourself from astronomical health care bills. Makes sense to me!

Today, the President’s Council of Economic Advisers released a report which found that slowing health care spending by 1.5 percentage points (from 6 percent a year to 4.5 percent) would create “as many as 500,000 jobs a year” and increase “annual income for the average family of four by $2,600.”

As Tim Foley explains, the report is a political win for the White House:

Simply put, Obama now has a political frame that’s going to be tough to beat.  On the one hand, you have Obama and the reformers.  If you give them $150 billion a year to make health care reform happen, you’ll get a productivity boost to the economy of your money back +$100 billion, half a million jobs, and your own personal windfall of $2,600.  By 2030, the report will propose, the extra money and productivity per family will be $10,000… oh, and we’ll have no one without the care they need.  On the other hand, you have the proponents of the status quo, or “anything but this.”  According to the report, health care will jump from 16% to 34% of our economy by 2040, we won’t get any of the goodies in terms of jobs or productivity bonuses, and we’ll likely have 72 million uninsured (or more) by 2040.  Gosh, which of those sides do you want to be on?

The CEA estimates assume the 1.5 percentage point reduction; policy makers are now stuck with the tough work of adopting reforms that would actually reduce health care spending and produce the $2,600 in savings. This is more feasible now than it was before. Yesterday, the health insurance industry released a 28-page report on cost containment options which, while largely uninspired, reiterates the industry’s belief (or concession) that we can lower the growth of health care spending by eliminating the waste already in the system.

Moreover, David Cutler recently authored a report for CAP in which he explains how to lower spending by 1.5 percentage points (he calls this “health care modernization”). Cutler writes, “health care modernization involves four broad steps: investing in infrastructure; measuring what is done and how well it is performed; rewarding high-value care, not just high-volume care; and realigning consumer incentives to encourage better health behavior.” You can read the policy details here, but the consequences of ‘modernization’ are quite substantial:

Health system modernization could increase productivity growth in health care by 1.5 to 2.0 percentage points annually starting in four to five years. The impact of such productivity improvement would be substantial. The federal government would save nearly $600 billion in health spending over the next decade, and $9 trillion over the next 25 years.

All this supplements any savings the Congressional Budget Office identifies for the federal budget, and presents a more complete picture of the savings produced by health care reform.