Healthcare overhaul could limit tax breaks on benefits

Pregnant women pay nothing for prenatal care; alcoholics aren’t billed for short stints in rehab. Seeing a therapist costs just $10, as many as 20 visits a year, and prescription drugs top out at $30 for a three-month mail-order supply. New Hampshire state employees get $450 annually toward gym memberships, if they go regularly, or $200 toward their own treadmill - and there’s a $150 annual reimbursement for yoga classes, diabetes clinics, and nutritional counseling.

They have what some call “gold-plated’’ or “Cadillac’’ health insurance. For just $60 a month, state workers’ families get coverage worth $20,400 a year, about 62 percent more than the plan the average American family gets through work. And because the federal government excludes health benefits from taxation, they pay no income taxes on any of it.

But that may be about to change.

Desperate to find ways to pay for a healthcare overhaul that could cost more than $1 trillion over the next decade, Congress has begun to look longingly at limiting the tax exclusion on employer-sponsored health benefits, which cost the federal government an estimated $225 billion in foregone tax revenue in 2008.

Ending the tax break entirely is out of the question politically, but next week the Senate Finance Committee is likely to propose limiting it in some fashion - by requiring people with the most expensive insurance, or the highest incomes, or both, to pay some taxes on their health benefits. President Obama, who is urging Congress to send him a bill this year, dislikes the idea but has not ruled it out.

Opponents of the tax exclusion want to get rid of it because they say it is grossly unfair - it gives the biggest tax break to those with the highest salaries and the best benefits, while the millions of Americans who don’t get insurance through their employer get little or no help at all.

“It provides enormous tax breaks to those who need them least, and little or nothing for millions of working families who really need help,’’ said Robert E. Moffit, director of the conservative Heritage Foundation’s Center for Health Policy. “If you are going to give a tax break, you should give it to taxpayers evenly.’’

But Diana Lacey, the chair of collective bargaining for the New Hampshire state employees’ union, says it’s wrong to call their plan “Cadillac’’ coverage, or to encourage employers to offer workers skimpy coverage. A health overhaul, she said, should “bring people up to the standard we have - healthcare that is responsible and affordable and you don’t have to go bankrupt to get the treatment you need.’’

Defending the status quo is an unlikely set of allies - executives of major corporations, who like being able to use tax-free health benefits to attract and retain employees; labor union leaders, who argue their members have sacrificed higher wages over the years to gain and retain good coverage; and some liberals who believe all Americans should have a generous health plan.

The Laborers’ International Union of North America, which represents some 508,000 construction workers and government employees whose family plans can be worth $18,000 or more in the most expensive healthcare markets, has already begun running ads targeting senators who want to limit the tax exclusion.

“If they think they’re protesting in Iran, if they pass a healthcare bill that’s going to tax my members’ benefits, they ain’t seen nothing yet,’’ said Terry O’Sullivan, the union’s president.

The Laborers’ International and other unions argue that tax policy should support workers who put a high value on good health benefits, so they don’t face bankruptcy or need public assistance when they get sick. The New Hampshire state employees’ union estimates that its members earn 20 percent less than other public sector workers in the state after repeatedly giving up raises in contract negotiations to keep their the generous benefits. It was an arrangement that for years also suited the thrifty state of New Hampshire - it could offer its workers a valuable benefit at a discount.

“It was cheaper for them to do that than to pay us more money,’’ Lacey said. She said the union, now involved in protracted negotiations with the state, would probably renegotiate its contract if the tax exclusion were limited.

Critics of the tax exclusion say it contributes to out-of-control growth in healthcare spending: Not taxing health benefits lets employers offer healthcare plans at a discount, which leads to more generous coverage that encourages beneficiaries to use more medical services. And since the supply of medical care is limited, costs rise for everyone.

“They don’t have has much incentive to think about things that would hold down the cost of healthcare as those of us who have less benefits do,’’ said Paul Van de Water of the liberal Center on Budget and Policy Priorities.

Over time, the benefits that allowed Lacey to get great healthcare without falling into debt as a young single mother have become an enormous liability for New Hampshire taxpayers. In fiscal 2008, employees’ medical and dental bills added up to nearly $234 million, according to state figures, up from $77 million in 1999.

As a result, the state has gradually pressured workers to contribute more to their healthcare in the form of modest monthly contributions and small copays. It’s a trend happening around the country as employees are facing growing out-of-pocket costs, according to research by the Kaiser Family Foundation.

Limiting the exclusion, however, will not be easy politically.

Larry Levitt, vice president of the Kaiser Foundation, points out that its polling shows 54 percent of Americans oppose the idea. Most of those who were open to it instantly changed their minds when told it could result in fewer employers providing coverage, or that it would take away a benefit that some employees had accepted instead of wage increases. Most people, Levitt noted, have health insurance they like and would not welcome paying taxes on it.

“I think it will put more pressure on Congress to demonstrate the benefits to the middle class of the rest of the health reform plan,’’ Levitt said.

As a candidate, Obama assured voters he wouldn’t increase taxes on families earning less than $250,000 a year, and he spent millions of dollars on TV ads lambasting Republican John McCain’s proposal to replace the tax exclusion for health benefits with a tax credit for all Americans. With pressure mounting to pass a hugely expensive healthcare bill, Obama has said he would consider capping the tax break but would prefer to limit itemized income tax deductions for higher earners as a way to pay for the healthcare overhaul.

Capping tax-free health benefits at the price of a basic family plan offered to members of Congress - about $13,500 a year - would raise $420 billion over the next decade. The Senate Finance Committee is considering a higher limit of $17,000, or about $4,500 more than the average family plan costs.

“You’re going to have a fight on your hands no matter what,’’ said MIT economist Jonathan Gruber, an advocate of limiting the tax deduction, who is advising the administration and Congress. “It’s a trade-off between raising enough money to make the fight worth it and how many people you have to fight with.’’

Lisa Wangsness can be reached at lwangsness@globe.com.