Why Capping the Health Benefits Tax Exclusion is Worth Considering

Getting some of the tax revenue necessary to pay for health care reform by taxing some employer-provided health benefits is under serious consideration on the Hill, and according to some reports the administration is open to it. John McCain proposed taxing health benefits and Barack Obama criticized him sharply for it on the campaign trail, so this is prompting some awkward moments for Obama advisers like Austan Goolsbee:

A more articulate defense is offered by Igor Volsky at the Wonk Room:

The problem was never the tax exclusion itself. Rather, progressives were concerned about what would happen to individuals who lost their employer-sponsored health coverage once the tax code changed. McCain proposed replacing the employee deduction with a one-size-fits-all tax credit without reforming the health insurance market or expanding access to group coverage. Under his plan, Americans who lost their employer coverage would have had to fend for themselves in an unregulated individual health insurance market; Americans with pre-existing conditions would have joined the ranks of the uninsured.

Obama is using the measure as a means to finance comprehensive reform. Should someone lose their employer-based coverage, they will be able to purchase affordable insurance through a regulated exchange that cannot deny coverage to Americans with pre-existing conditions.

Perhaps the right way to think about this is that limiting the tax-preferred status of employer-provided health care has long been on progressives’ radar as a possible way of financing health care reform. Part of the appeal to the McCain campaign of using this method to pay for their own proposals was almost certainly that they knew perfectly well that many progressives were on record as supporting something superficially similar. This, they hoped, would compel progressives to “go soft” on McCain’s proposed tax hike. But they were wrong. Still with any tax, you have to ask what you’re getting for the tax to really evaluate it. Comprehensive health care reform requires additional revenue, and that’s bound to make someone unhappy. But there are a variety of possible revenue sources that would be well-worth the cost in order to achieve the substantial benefits of health care reform.