The Baucus Health Plan & The Tax Incentive Tweak

During the presidential campaign, progressives criticized Sen. John McCain (R-AZ) for dismantling the employer-based health insurance system by exposing employee tax benefits to income taxes. This morning, Sen. Max Baucus (D-MT) proposed financing his comprehensive health reform plan by reforming the tax incentives for employer coverage.

So what’s the difference? Why aren’t progressives jumping down Baucus’ throat and accusing him of treason? While McCain proposed replacing the employee deduction with a one-size-fits-all tax credit without reforming the health insurance market, Baucus pairs employee-tax tweaks with market reforms that would increase access to group coverage.

Baucus proposes two changes to the tax exclusion: capping the amount of health care premiums that can be excluded from employee wages and restructuring the exclusion on a sliding scale based on income, giving people with lower wages a larger deduction. But, since the plan simultaneously expands Medicaid, Medicare and SCHIP, creates an insurance exchange, allows Americans to buy into a new public plan, and ends discrimination against individuals with pre-existing conditions, the restructuring of the tax exclusion would not leave Americans without coverage.

Most progressives recognize the regressive nature of the employee tax exemption. As the Baucus white paper points out, “current incentives are also regressive because they are, for the most part, more valuable to taxpayers who are subject to higher marginal rates. As such, they give larger subsidies to higher-income workers, instead of to the lower income Americans who need more help buying insurance.” In fact, even Obama adviser Jason Furman argued that our current tax exemption for health insurance could (or should) be revamped.


The Baucus plan also meets another progressive requirement: it builds on the current employer-system. While the employer-based system isn’t perfect, it plays a crucial role in connecting Americans to coverage by encouraging risk pooling through employer policies and guarding against adverse selection. Baucus seeks to expand and strengthen the system by requiring employers to offer a Section 125 plan which would allow employees to pay their health insurance premiums through their employer’s payroll deduction and with pre-tax dollars.

As Ezra Klein points out, “by offering something that hews closely to Obama’s principles and traces the expressed preferences of most leading Democrats, [Baucus] he’s constructed a broadly acceptable base on which to build the process. There is plenty yet to be defined, traded, added, and decided — which is to say, there is plenty of reason for other senators to take a role in the process. If his colleagues agree, then this will be, as Baucus hopes, Max Baucus’s health reform process.”