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Conservative Wonks: Time to Debate Tax Treatment of Health Benefits

Analysts from the Heritage Foundation, the Galen Institute, and the National Taxpayers Union said Monday that it's time for Congress to step up to the plate and debate the continued existence of the deduction of employer-paid health insurance premiums from employee income.

A petition circulated by the groups to attract media and congressional attention to the issue says deduction of the premiums from income and payroll taxes should end because it keeps market forces from restraining the galloping growth of health costs.

"We've created this system that's destroyed any semblance of the free market," Heritage Foundation analyst Daniel J. Mitchell told a standing-room-only forum on Capitol Hill. Health costs would fall if they were paid out of pocket with insurance coverage reserved for catastrophic expenses, he said.

The exclusion from taxable income "provides a huge incentive for employers rather than consumers to purchase health insurance and has resulted in a system that hides from workers the true cost of their health care consumption," the petition states. The result is artificial support of increased demand for more expensive health insurance and medical services, the petition adds.

"Employers should continue to be allowed to deduct the cost of health insurance as a legitimate business expense, but employees should not receive tax exemption for an unlimited amount of health insurance," according to the petition.

"Congress could begin by capping the amount of income that employees can shelter from taxes, allowing only a fixed dollar amount of health insurance to be tax exempt. A better approach would be to eliminate the employee tax exclusion for health insurance. If it is the policy of the government to encourage people to buy health insurance, it might better be done by means of allowances targeted directly to individuals to assist them in purchasing the health coverage of their choice."

Galen Institute President Grace-Marie Turner said after the event that if a cap were in place, employees would work with employers to keep the costs of coverage below the ceiling in order to avoid paying higher taxes.

House Ways and Means Committee Chairman Bill Thomas, R-Calif., "thinks we ought to have a national debate, and so do some of his colleagues," said Robert Moffitt of the Heritage Foundation. Moffitt named as examples Rep. Jim McCrery, R-La., Senate Majority Leader Bill Frist, R-Tenn., and Sen. Ron Wyden, D-Ore. Though invited to speak at the event, Thomas was a no-show.

Thomas periodically criticizes the deduction, including in a speech last year explaining how he would like to overhaul the health system and create a system of universal coverage. But politically the challenge would be enormous even if the deduction were capped rather than eliminated.

One questioner in the audience at the event sponsored by the Heritage Foundation and the Galen Institute commented that if a cap were proposed, "the medical industry and the insurance industry will form coalitions to preserve the salad bar that they now have."

But panelists suggested that the tide could be turned with arguments to the business community that changing the taxability of premiums would fuel economic growth and begin reining in "astronomical" health care costs. Turner said the point should be made that the current system heavily subsidizes health insurance for the affluent. Subsidies instead should be directed to poor people, she said.

The conservative think tanks seek to prod the President's Advisory Panel on Federal Tax Reform to take up tax treatment of health care benefits. Former senators Connie Mack and John B. Breaux are chairing the commission.

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