Will Obama Tax Employer-Provided Health Benefits?

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Barack Obama holds a town-hall meeting on health care in Annandale, Va.

As lawmakers continue to struggle to find a way to pay for a health reform that could cost $1 trillion or more over the next decade, Barack Obama seems to be opening the door a little wider to an approach he soundly rejected when John McCain proposed it during last year's presidential campaign: taxing the health benefits that employers provide their workers. "This argument has evolved," he said Wednesday at a town-hall meeting on health care in Annandale, Va. And it appears that Obama has too.

During the campaign, Obama had been scathing in his criticism of McCain's plan. One of his ads noted that the GOP nominee advocated "taxing health benefits for the first time ever ... taxing health care instead of fixing it. We can't afford John McCain." But in recent days, Obama's top aides have signaled a new openness to the idea. "There are a number of formulations, and we'll wait and see. The important thing at this point is to keep the process moving, to keep people at the table, to keep the discussions going," his top strategist, David Axelrod, said last weekend on ABC. "We've gotten a long way down the road, and we want to finish that journey."

On Tuesday, Obama himself sounded almost resigned that taxing health benefits is now front and center in the health-care debate. "This is something that's going to be debated in the House and the Senate," he told the Virginia audience. "[Virginia Senator] Mark Warner is going to have to weigh in on it. We're all going to have to weigh in on it." The President says he still wouldn't go as far as McCain proposed and completely eliminate the current exclusion on taxation of employer-provided health benefits. (McCain would have offset that with a tax credit of up to $5,000.) But Obama is indicating a new willingness to go at least part of the way there.

"Nobody at this point is — or not many folks — are talking about taxing benefits or completely eliminating the exclusion," Obama said. But he noted that taxing benefits above a certain point — citing, as an example, $13,000 a year — would have some benefits in holding down costs overall. "If you get some Cadillac plan that costs $17,000, then what we're going to do [under this scenario] is you're going to have to pay taxes on that last $4,000," Obama said. "And the idea that is being debated in Congress right now is, Is that a good way to ensure that people don't have these big Cadillac plans but instead have more sensible plans?" (Read "The Year in Medicine 2008: From A to Z.")

The major reason lawmakers are considering taxing these benefits for the first time: there's a lot of money involved. Depending on how it is structured, a tax on the most expensive benefits could bring in hundreds of billions of dollars over the next 10 years, the Congressional Budget Office has estimated. But it would be a politically treacherous move that would not affect only the wealthy. Many of those generous health plans are also part of union contracts — and in many cases were negotiated in lieu of higher wages — which means Obama might have to go back on his campaign promise not to raise taxes on those earning less than $250,000 a year.

Another complication is that the average cost of employer-provided plans varies widely across the country. In 2006, for example, the average employer-provided plan for a family in New Hampshire cost $12,686; in Hawaii, the average was only $9,426, according to statistics compiled by the Kaiser Family Foundation. So it is no surprise that lawmakers from states where health coverage is more expensive are wary of the idea. A way around that problem, says Massachusetts Institute of Technology economics professor Jonathan Gruber, would be to have the taxes kick in at different levels in different states. "Otherwise," he says, "you would be putting too much pressure on New York and not enough on Mississippi."