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Senate Panel Suggests Tax on Sweet Drinks to Pay for Health Care Overhaul

By Alex Wayne, CQ Staff

May 18, 2009 -- To pay for an expansion of health insurance to nearly every American, lawmakers are considering taxing beverages believed to be unhealthy—alcohol and, for the first time, sweetened beverages such as sports drinks, fruit punch, and soda.

The leaders of the Senate Finance Committee released a document Monday outlining an increase in the federal excise tax on alcohol and proposing a tax on sugared drinks among the options to pay for a health care overhaul that could cost more than $1 trillion over 10 years. The document is the last of three that committee Chairman Max Baucus, D-Mont., and ranking Republican Charles E. Grassley of Iowa planned to release before they try to draft overhaul legislation in June.

Committee members will privately discuss the financing proposals Wednesday. The document says that Baucus and Grassley don't support all of the proposals, but it does not specify which proposals are backed by either man.

At a meeting May 12 to discuss how to pay for an overhaul, Finance members focused on taxing the value of employee health benefits. That proposal is further developed in the document released Monday.

Under current law, workers are not taxed on the value of the health insurance provided by their employers, allowing them to pay their premiums with pretax income. This tax exclusion is enormously costly for the government: about $133 billion in 2008. And some economists argue that the exclusion encourages overuse of health care resources, because expensive insurance plans offering generous coverage get as much of a tax break as lower-cost plans with more coverage limits.

Congress is unlikely to eliminate the exclusion—a move that would prompt opposition from both employers and labor unions. But the Finance Committee document proposes ways it could be limited or capped.

Legislation might simply cap the exclusion, taxing benefits that exceed a specific dollar value or taxing the benefits of workers whose incomes exceed a specific amount, such as $200,000—the example the document uses.

Or lawmakers could get more creative, the document suggests, and limit the exclusion based on some formula that takes into account workers' incomes, the value of health insurance, the cost of living in different regions of the country, and inflation.

Lawmakers might also provide workers a tax credit or deduction—or a combination—to replace the tax benefit they lose by limiting the exclusion.

The document proposes a number of ways to raise money from within the health care system by changing what the government pays health providers, including hospitals, physicians, and drug companies, under Medicare and Medicaid. Adopting any of those proposals will provoke a lobbying fight by the affected providers.

The document also includes a proposal to means-test premiums that seniors pay in Medicare's prescription drug program. Congress began requiring higher-income seniors—those earning at least $85,000 a year—to pay a higher premium for Medicare outpatient insurance, known as Part B, in 2007. But that requirement does not extend to the drug benefit, known as Part D.

Beverage Industries Oppose Proposal

The proposals to increase taxes on alcohol and create a tax on sugared beverages provoked strong opposition from those industries. The document does not specify how it would tax soda and other beverages containing sugar or other sweeteners. But the tax would be aimed only at beverages believed to contribute to obesity because of the calories in their sweeteners; drinks containing zero-calorie sweeteners, such as diet soda, would be excluded.

Kevin Keane, a senior vice president at the American Beverage Association, which represents soft drink makers, noted that recent attempts to levy similar taxes in New York and Maine were unsuccessful in the face of public opposition. "We don't think that the public and, ultimately, lawmakers will have a great taste for taxing soft drinks," he said.

Alcoholic beverages are taxed at varying rates depending on the type of beverage and amount of alcohol. Table wine and beer generally are taxed at lower rates than liquor.

The document proposes taxing alcoholic beverages at one rate tied to the amount of alcohol they contain. It suggests a rate of $16 per proof gallon, which would be higher for all types of beverages. The tax on beer would more than double, and the tax on wine would more than triple.

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