Wednesday, October 12, 2005

Tax Reform Proposals

Today’s BNA Daily Tax Report (Wednesday, October 12, 2005) reports that the President’s commission on tax reform is considering a couple of important issues that are likely to have widespread impacts on taxpayers: limiting the exclusion for employer-provided health-care costs and tightening the limits on home mortgage interest deductions.

Employers are currently allowed to deduct, and employees correspondingly exclude, the cost of employer-provided health care benefits. The employer deduction is conceptually based on the concept of compensation for labor. In this case, the employee gets a benefit in kind instead of cash. From the employee’s perspective, getting this benefit in the form of health insurance sweetens the deal considerably, as this employee benefit is not subject to income taxation.

Assume, for example, that the health insurance costs $10,000 per year. If you are in the 25 percent tax bracket, this means that you would otherwise have to earn $13,333 in order to have enough left after taxes to pay for this benefit. The treasury suffers, but the goal of health insurance coverage is probably enhanced.

On the other hand, since these dollars come to you in an opaque form (i.e., you never see them or feel them going through your fingers) it is entirely possible that you are not personally aware about the high cost of health insurance. True, most employees pay at least a part of their coverage, but at many large companies (and universities) the amount that employees pay is but a small part of the total.

Some commentators have attributed part of the rise in health care costs to the fact that there is little market discipline in the form of consumer responses to increased prices. Of course, insurance companies and employers who pay those bills have been responding, though perhaps the incentive is not the same. After all, the employer who provides a health benefit gets to deduct the cost, and in fact that employer may even be able to extract a benefit from employees in the form of a wage concession linked to part of the tax savings. (I have not checked the economics literature on this, though perhaps my colleague Dr. Goss will comment on this in the future.)

Putting a cap on the total benefit employers could provide would send some important signals to the marketplace of employees who are also consumers of health insurance regarding where their money is going. The discussion on the cap targets it to $11,000 per year, which still allows quite a lot of tax-exempt income for employees.

I’ll address the mortgage interest proposal in a later post.



Faust said...

More importantly, what can Nebraska do to increase health insurance coverage for small employers?

Nebraska Employee Benefits Survey

UNMC will be doing a survey of small employers in the near future to do a more in depth needs assesment in the provisioning of health insurance.

See some innovative states in action here in Business Week
"They've Got You Covered"

Faust said...
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Anonymous said...

Intersting what employers can do to affect out health insurance.