The Brewing Controversy Over Health Benefit Taxation

Lost in the AIG bonus kerfuffle this week, is the developing story over the about-face that the Obama Administration appears to be making on the taxation of health benefits to employees.

According to a story in this past Sunday's NY Times, while President Obama will not openly push for such a change in policy, he "will not object if Congress takes up the issue".

A Little History

Health benefits, as offered to employees of companies that offer them, (those companies left that still offer them, that is), are not taxed as part of ordinary income due to a quirk in the law that goes back all the way to WWII.

During wartime, due to wage freezes, companies that wanted to attract or retain good workers could not offer salary raises or bonuses, so instead they begin to offer excellent benefit packages, inadvertently creating today's employer-sponsored health care system. Because industry had many friends in Congress, these benefits were not taxed at the time, and have remained untaxed for over sixty years, resulting in huge tax savings to employees, totaling over 246 billion dollars this past year.

Sen. Max Baucus

The Problem for Obama

The problem for President Obama, and the reason why he must tread lightly on this issue, is twofold, and in both instances, political: first off, he made a specific promise during the presidential campaign not to tax benefits, calling Sen. McCain's plan to do so a "multi-trillion dollar tax increase"; as George Bush Sr. famously found out, voters tend to be rather unforgiving when it comes to campaign promises concerning tax increases.

Secondly, one of President Obama's most loyal (and most powerful) constituencies, the trade unions, are vehemently opposed to the taxing of benefits, because their rank-and-file members receive enormous benefit in the form of huge tax-savings under the current system. Angering the Teamsters and the other unions is probably not something that the Administration wants to do at this time, so any proposal that advocates the taxation of benefits will also have to come with assurances that the added cost to employees will come with substantial savings and or service improvements in other areas, such as lower overall health care costs, and improved access for all.

The Fundamental Problem

Neither of the above problems, however, appears to be insurmountable for Mr. Obama, who appears to be able to wily circumvent all political obstacles that special interests throw at him.

No, I believe that the problem with the taxation of health benefits is a more fundamental one, one that gets overlooked by many who focus strictly on the pros and cons of the numbers in play. Namely, I believe that the problem lies with messing with what works, in other words, making huge changes to the health benefits of those who are happy with their insurance, and do not want anything to upset the balance of care and cost that they currently enjoy.

While this may appear to be an egotistical position to take, it is nonetheless what millions of Americans firmly believe in, and one that can ultimately sink any well-meaning program of reform.

In fact, any health care reform plan, once drafted, absolutely must ensure that any American who is currently enjoying his or her insurance coverage, will be able to continue with the same standard of care, without substantial changes in cost and service levels. Upsetting this balance, which taxing employee health benefits might very well do, could doom any hopes for meaningful reform, as the insurance industry, and the wider health care industry as a whole, is sure to use tactics that will scare voters into not accepting such measures.

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