White House signals openness to taxing workers' health benefits

The proposal, which is strongly opposed by union leaders and some businesses, is politically problematic for President Obama, who met yesterday with President Luiz Inacio Lula da Silva of Brazil. (Joshua Roberts/ Bloomberg News)

WASHINGTON - The Obama administration is signaling to Congress that the president could support taxing some employee health benefits, as several influential lawmakers and many economists favor, to help pay for an overhaul of the healthcare system.

The proposal is politically problematic for President Obama, however, since it is similar to one he denounced in the presidential campaign as "the largest middle-class tax increase in history." Most Americans with insurance get it from their employers, and taxing workers for the benefit is strongly opposed by union leaders and some businesses.

In millions of dollars worth of television advertisements last fall, Obama criticized his Republican rival for the presidency, Senator John McCain of Arizona, for proposing to tax all employer-provided health benefits. The benefits have long been tax-free, regardless of how generous they are or how much an employee earns. The ads did not note that McCain, in exchange, wanted to give all families a tax credit to subsidize the purchase of coverage.

At the time, even some Obama supporters said privately that he might come to regret his position if he won the election; in effect, they said, he was potentially giving up an important option to help finance his ambitious healthcare agenda to reduce medical costs and expand coverage to the 46 million Americans who are uninsured. Now that Obama has begun the health debate, several advisers say that while he will not propose changing the tax-free status of employee health benefits, neither will he oppose it if Congress does so.

At a recent congressional hearing, Senator Ron Wyden, Democrat of Oregon, whose own health plan would make benefits taxable, asked Peter R. Orszag, Obama's budget director, about the issue. Orszag replied that it "most firmly should remain on the table."

Orszag, an economist who previously was director of the Congressional Budget Office, has written favorably of taxing some employer-provided health benefits and using the revenue savings for other health-related incentives. So has another Obama adviser, Jason Furman, the deputy director of the White House National Economic Council.

They, like other proponents, cite evidence that tax-free benefits encourage what McCain called "gold-plated" policies, inefficient and costly demands for healthcare as a result, and pressure on employers to hold down workers' pay as insurance expenses rise. And, they say, the policy discriminates against those - mostly low-income workers - who do not have employer-provided coverage.

When Senator Max Baucus, Democrat of Montana, advocated taxing benefits at a recent hearing of the Senate Finance Committee, which he heads, Timothy F. Geithner, Obama's secretary of the Treasury, assured him that the administration was open to all ideas from Congress. Geithner did allude, however, to the stand Obama had taken as a candidate.

The administration's receptivity to the idea is partly due to the advocacy of Baucus, whose committee has jurisdiction over tax policy and health programs, and to support from Republicans.

Also, Obama's own idea for raising revenues for healthcare - limiting the income tax deductions that the most affluent taxpayers claim - has run into opposition not only from Baucus but from his House counterpart, Representative Charles B. Rangel, Democrat of New York, Ways and Means Committee head.

Obama's proposed limit on deductions would raise an estimated $318 billion over 10 years, or half of his proposed "healthcare reserve fund." That is a fraction of the revenues that could be raised from taxing employer-provided health benefits.

McCain estimated in the campaign that taxing all health benefits would raise $3.6 trillion over a decade - "a multitrillion-dollar tax hike," one Obama advertisement said.

The Congressional Budget Office says that including health benefits in taxable income could mean $246 billion in additional revenues for a single year. Stopping short of full taxation, as Baucus and others suggest, would of course mean fewer new revenues.

The latest government figures, for 2007, show that 70 percent of the 253 million people with health insurance - 177 million people - got at least some of their coverage through employers. Employment-based insurance covers three-fifths of the population under 65.