Tax Breakup: Conservative Think-Tankers Face an Unexpected Opponent: Employers

By Dreyfuss, Barbara T. | The American Prospect, January 2006 | Go to article overview

Tax Breakup: Conservative Think-Tankers Face an Unexpected Opponent: Employers


Dreyfuss, Barbara T., The American Prospect


EMPLOYERS FACE NEW OPPOSITION in their efforts to rein in healthcare spending, and it's not coming from the employees whom they are forcing to foot more of the bill. Instead, employers are at odds with their allies in the conservative think-tank world, who are mounting an all-out offensive to unravel the employer-based insurance system, which covers nearly 60 percent of Americans, by proposing to tax that benefit.

The rift between the conservatives and the employers surfaced recently after a report by a bipartisan advisory commission of academics, Wall Street insiders, and former members of Congress appointed by George W. Bush to recommend tax reforms. In November, that panel, after heavy lobbying by a coalition of right-wing activists, suggested that workers' health benefits be counted as income and proposed to cap the amount of insurance that could be offered tax-free.

The tax exclusion dates to an IRS ruling in 1943 that employees did not have to pay income taxes on the value of health benefits offered by employers. The decision sparked the growth of employer-provided benefits because it gave companies a way to attract scarce workers during the war when their options were limited by government wage controls. Today it is the backbone of employer-provided health benefits. The tax exemption of health benefits saved Americans $122 billion in taxes in 2004, consultants at the Lewin Group estimate; the average family saved $1,482.

The panel's recommendation was modest in scope. But even so, it represented the first high-level push for altering the tax-free status of health benefits since the Reagan administration. "We took some sacred cows and put them into public discussion," boasts University of Southern California professor Elizabeth Garrett, a panel member.

The commission would have recommended total abolition of the tax break, claims Grace-Marie Turner, president of the conservative health- and tax-policy shop, the Galen Institute, which helped spark the proposal, "but said they felt there was too big an infrastructure built up to recommend that off the bat and that they would instead recommend a haircut."

Both Turner and Daniel Mitchell, senior research fellow at The Heritage Foundation, worked hard to convince the panel and its staff to propose a limit on the tax exclusion. They organized 49 conservative groups, including the American Enterprise Institute, Heritage, the Cato Institute, the Pacific Research Institute, and the American Conservative Union, to back the plan. Members of this group spent hours with commission staff lambasting the tax exclusion and sent reams of paper to support their case. Several economists from the group testified at panel hearings.

There is little sign that either Congress or the president wants to spend much political capital right now on the panel's recommendations. But Turner vows that "we're going to do what we can to keep this issue front and center." And later this year, Treasury Secretary John Snow is expected to recommend a set of changes to the tax code. The proposed cap could be among those, or it could surface in Congress as a budget proposal.

IF AND WHEN THE BATTLE DOES START, the conservative think-tankers likely will be without their important natural ally: business. Employers were alarmed by the panel's proposal. National Association of Manufacturers (RAM) president John Engler called it "quite troubling." Employer groups decried it in discussions with Capitol Hill staff. The health-insurance industry rushed to warn politicians that a tax on health benefits won't win them votes. The industry trade group, America's Health Insurance Plans (AHIP), released a survey of voters in the three early presidential primary states of Iowa, New Hampshire, and South Carolina showing that nine-tenths of respondents did not want health benefits taxed.

The proposal would cause employers administrative nightmares and create more uninsured, warns Steven Wojcik, vice president of public policy at the National Business Group on Health, which represents many Fortune 500 companies.

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