Christina Romer on the Health Tax Exclusion

Council of Economic Advisers Chair Christina Romer did an interesting interview with Ezra Klein mostly focused (naturally) on the recent CEA report on health care. But I thought this dancing around the issue of the exclusion of employer-provided health benefits from taxation was probably the most interesting part:

Ezra Klein: You talked a lot in the report about the inefficiencies in the system. One of the sections — the second, if I remember — talks about price sensitivity and the way consumers don’t see the true cost of health care, and thus don’t have the full incentive to press down on the system. You also have a great graph on the fifth page showing the bite that health care takes out of compensation, but most workers don’t know about that connection. For all that you don’t mention the employer tax exclusion anywhere, which most economists I’ve spoken with over the years to seem to think is the key driver behind consumer insulation. Any thoughts on that?

Christina Romer: I have to tell you it’s there in a crucial footnote! [Laughs] You can’t say it’s not in the report!

It is something that a lot of health-care economists say provides an incentive to do expensive things. We heard Senator Baucus say today he wants it on the table. It’s not something the president has supported, and certainly the way it was done in the campaign, taking it off for everybody, that’s a bad idea. But at the event I was at today, David Cutler and Mark McClellan made the point that there are things in-between. Cap it for a Cadillac plan, for instance.

EK: Do you think there’s openness to these midpoint compromises? Capping it for plans, or at a certain level of income?

I’m trying not to prejudge the legislative process.

During the campaign, John McCain basically proposed just doing away with this tax break and replacing it with a little hocus pocus that would have left most families high and dry in the medium-term. The Obama campaign went after that with some very hard hits. Consequently if, as seems likely, the legislative process winds up involving some curbing of the tax exclusion you’re going to see charges of hypocrisy and flip-floppery.

So part of what’s happening here is an effort to start laying the groundwork for distinguishing between the Senate may want to do in terms of financing comprehensive health care reform and what McCain proposed during the campaign. In this section, Romer is pointing to the possibility of curbing the tax preference without necessarily hitting people of modest means enjoying average health plans. I would say, however, that the biggest difference is in terms of what the tax hike would be paying for. Neither the HELP Committee nor the Finance Committee is proposing to unravel the employer-based health insurance system and then just kind of hope for the best, à la McCaincare.

Instead, the idea is to construct a much firmer system that will ensure the available of affordable health care for everyone at all times and they pay for that in part by curbing the tax exclusion. That makes all the difference in the world. In general, higher taxes are undesirable, but when they’re used to finance something worthwhile that’s fine.