More Questions Than Answers For Tax Reform Proposals

John A. Marcille

As our recent hurricane experiences prove, what government does, or doesn't do, matters a lot. Now, in health care, the prevailing wind may be starting to blow in the direction of tax reform.

In our cover story, Contributing Editor Martin Sipkoff writes about how some lawmakers, including Senate Majority Leader William Frist, think that it might be time to end the tax exclusion for job-sponsored health benefits. Employer-sponsored health care isn't going to disappear, but expect significant changes in the next few years — especially if tax code reform becomes reality.

One of those Sipkoff talked to is Uwe Reinhardt, PhD, James Madison Professor of Political Economy at Princeton. Reinhardt warns that tax reform raises questions. “I favor the complete elimination of this preference, just as do the folks at the Heritage Foundation and Mark Pauly,” says Reinhardt. “They've just never explained to me exactly how — very concretely how — that would be done, step-by-step.”

He asks: “Exactly how would one withdraw the tax preference? At the extreme, employers might be mandated to add what they now spend on health insurance premiums to the employee's taxable income on the W-2 form. But how much? Would it be an amount averaged over all employees — young and old, healthy and sick? Young workers might deeply resent having to pay taxes for something that really benefits not them but their older and sicker colleagues. We could, of course, risk-adjust the amount — say, add only $2,000 to the taxable income of a young worker and $12,000 or more to the income of an older sicker worker. Can you imagine the litigation this would trigger?”

Reinhardt concludes: “Am I missing something?”

MANAGED CARE October 2005. ©MediMedia USA