Tax Experts Push for Overhaul (killing health-insurance deduction)

[spinbaby]

Tax Experts Push for Overhaul

NEW ORLEANS - The more than $150 billion spent on health insurance tax benefits does more harm than good, witnesses told a presidential panel studying tax reforms.

"It is such a bad subsidy. It's increasing the number of uninsured," said Eugene Steuerle, senior fellow at the Urban Institute. "It's one of the worst subsidies that we could possibly imagine."

Steuerle and Mark Pauly, a health care economics professor at the University of Pennsylvania, argued that tax breaks given to employers and employees for health insurance don't promote the spread of basic health insurance coverage.

Instead, the incentives cause people to buy excessive amounts of insurance to lower their taxes. That means costs increase, causing some employers to drop their health insurance coverage altogether.

http://story.news.yahoo.com/news?tmpl=story&cid=513&e=18&u=/ap/tax_overhaul

[blogbear]

1. Sky Rocketing Premiums and Health Care Costs Are What Deter..

People from being insured..

[AP]

24. And subisdizing those prices with a tax break makes them skyrocket

so long as there's not mechanism in place to offset the effect of the tax break.

[Trillo]

36. Self-delete, sorry.

[blogbear]

44. Those tax breaks are one of the very few perks some of us can even get..

[AP]

57. Right -- you get crumbs, and you're happy to get them.

But they're part of a system that is extremely unfair to you.

[iamjoy]

45. HOW?

how does subsidizing prcies make them skyrocket?
What effect of the tax break must be offset?

[AP]

56. Because before there's a tax break, insurance is priced at a level the

market establishes. When you give people more money to buy insurance (which is what the tax break is) the insurance company realizes that they can raise the price a little bit and tap into that extra money.

Another thing this article points out is that because taxes are progressive, the higher your tax break, the bigger the break. If you only pay 10% or if you get a tax credit, the tax break isn't worth very much. But if you pay 35% income tax, and say you own a company which pays a lower tax rate and has no problem coming up with deductions, then you're better off canceling the corporate insurance plan and getting personal plans which save you 35 cents for every dollar you pay.

Meanwhile, insurance companies price their policies for these customers, and the schmos who get only a 22% break on their insurance payments (or aren't employed or get an EIC) get screwed twice: they only get a break worth 2/3rd or less of what the 35% tax bracket earner gets, and they have to buy in a market with overheated prices.

[ET Awful]

2. LOL . . . ummmm, yeah.

So, what we'll do is make it so it's not deductible, so poorer people will be even more likely to not buy it, since it will mean more cash in their pockets to pay for food, rent, etc. Employers won't buy it because they get no financial benefit from doing so. Both of which mean even more of a health care crisis.

Yup, sounds like a great fucking idea to me.

[ProfessorGAC]

10. That Was My Thought Too

This is a disincentive, so provided no tax break is more incentive? That's extremely tortured logic.

This is a severely flawed analysis, mostly due to the fact that it tries to place this incredibly complex situation into X v. Y. Two dimensional thinking in economics will result in bad policy and poor conclusions every time.
The Professor

[AP]

25. Your thoughts on post 16?

I thought I'd get a few more responses, but I guess I'll have to go fishing for a discussion.

[Media_Lies_Daily]

13. Incredibly cold, isn't it?

[mmonk]

3. Bwahahahahahahaha

Yeah, everyday I think about how I could pay more in health insurance so I could get a bigger tax break. What planet do people in this country come from?

[Gin]

4. Beam Me up Scotty!

what planet are we on?

[mmonk]

5. I can't find it on any co-ordinates.

[Divernan]

6. Can't deduct it anyway unless it's greater than 7.5% of income

Do the friggin math, you head-up-your-*****, economics professors! No one can deduct ANY health expenses unless they are more than 7.5% of their adjusted gross incomes. That means for an AGI of $50,000, you can't deduct the first $3500 of medical costs, including health insurance premiiums. That was another of St. Ronnie's tax increases under the table, which wiped out most taxpayers' uncovered health costs. Businesses are trying desperately to cope with the annual double digit increases in health insurance costs. Employees are being made to pay more and more of their health insurance costs every year, and coverages are being narrowed every year.

[ET Awful]

12. But employers can deduct the expense of their share of the premium

Take away that deduction and employers loose their incentive for having insurance for their employees. Everyone loses.

[NJGeek]

15. NOT TRUE

If you are self-employed you do not have to meet the 7.5% test, and employers never do.

[SiouxJ]

21. True but depending on where you live, you can deduct them from

your state taxes. If you have lots of medical expenses, make sure you are aware of your state tax laws people.

[iamjoy]

46. Most Group Health Insurance Premiums Are Pre-Tax

it's a Section 125 deferral, it comes out of a person's paycheck before taxes, thus lowering their taxable income. It doesn't matter what percentage of their pay it is.

[Disfronted]

50. Correct. It is even exempt for FICA/Medicare n/t

[wolfgirl]

7. WTF?

These "witnesses" obviously live in an alternate world....

[salin]

8. yep - at a time of skyrocketing increases by health insurance

co.s the trick to increasing coverage is to make said coverage even more expensive to employers (by taking away the subsidy). Yep it is tax policy rather than insurance companies that is the cause of rapidly increasing costs - and increasing number of uninsured.

Insane.

[Mister K]

9. Thats nice....

I am self employed (independent software consultant) and I pay health insurance for myself and my family. I pay about $12,000 per year and I take it as a deduction for money that my company receives for services. Removing it would make it even more difficult to afford for myself and others like me. Especially since most of my potential jobs are going to India and rates are staying low.

[Frances]

23. Do you take the health insurance deduction on Schedule C?

I am self employed and I had no idea that I could claim my health insurance costs (and they are high) as a tax deduction anywhere but Schedule A.

[Mister K]

42. You need a Corporation (can be S or C) or LLC.

You can take it as an itemized deduction. 100% of it as well. It is an expense to the company like any other.

[annabanana]

11. U of Penn Economics "Mark Pauly"

I found him..here's his page:

http://www.wharton.upenn.edu/faculty/pauly.html

[RedEarth]

14. Get real .....you idiot......what about the 44 million who can't afford

health insurance...I guess, they just like to pay taxes....strange logic at the Urban Institute.

[AP]

16. The same logic applies to home mortgage interest deduction.

One of the factors that encourages people to pay more for house than they might have otherwise is that they know that they'll get a deduction for huge interest payments in the early years of the mortgage.

The upside is that you encourage home ownership. The downside is that you drive up housing prices, and you subsidize the profits of lenders (ie, you get people to pay more interest than they would have without the tax deductions). It's basically a transfer of wealth from the public into the hands of private companies.

So, would you rather have the tax deduction for the mortgage, or would you rather have a mortgage that's half as large?

Similarly, would you rather have the health insurance deduction, or would you rather have health insurance that costs significantly less (and would you rather not have so much wealth flow to insurance companies, underwritted by US tax payers).

I think the bottom line here is that any time the US gov't is going to subsidize the profits of a private industry (whether, mortgage lenders or health insurance companies), they're going to have to come up with mechanisms that prevent the subsidy from driving up prices as well.

For exampele, instituting a national health insruance program with fixed insurance rates and decent coverage would compete with private insurance and keep prices from skyrocketing. I don't know enough about the mortgage industry, but it would be cool if Fannie/FreddieMae were direct lenders to more types of homeowners and gave fixed, low-rate mortgages (or maybe, states could be allowed to institute low-interest rate mortgage programs for state employess) or something like that.

In other words, any time the government offers a tax subsidy that helps a private company profit, the government should probably also step into that marketplace and provide the same competitive service so that prices don't grow out of control. Private companies should be willing to take a little burden with the huge benefits of having taxpayers subsidy their profits.

[spinbaby]

17. So you're saying...

...that if there's less money to spend on health insurance then the price of health insurance will go down?

I'm not holding my breath on that one.

[AP]

20. I'm saying that tax breaks for money spent on private companies...

...is just a subsidy for the profits of that private comany that we all pay. It's a transfer of wealth from public to private hands.

I'm saying that if you give a tax break for payments to private companies, you better do some additional thing that prevents the prices those private companies charge from skyrocketing.

One way is for the government to compete in the marketplace as well. So, the government should provide national health insurance at competitive rates. Another thing the government could do is fix insurance prices.

The bottom line is that if you just offer the tax break and do nothing to limit prices, the insurance companies just raise prices, and the taxpayers are left paying for that once by reducing the amount of taxes the gov't raises, and the second time by paying higher insurance costs than they would otherwise, and a third time by helping make insurance companies the most economically, politically and culturally powerful institutions in America.

[unhappycamper]

19. The pubs have this covered already - it's called AMT

[AP]

22. I believe that it is deductible for AMT purposes so long as...

...you use the mortgage to buy, construct, or substantially improve a principal or, in certain cases, a second residence.

I think if you refinance at a higher than market value price, or if you use the loan to pay for anything other than buying, constructing or substantially improving your home, it's not deductible for AMT purposes.

I really don't know. Maybe someone in this situation can let us know if they're able to reduce their federal income taxes to almost nothing thanks to the home mortgage interest deduction.

[ProfessorGAC]

26. These Are Good Points

The analogy is a little flawed, IMO, because there is direct long-term economic benefit to the encouragement of home ownership.

Health care, as important as it is, is a transient economic phenomenon. I keep hoping for cures to serious diseases so that the cost of treatment will go down! Spending money on health care only addresses the current condition. Once that money is spent, it's lost as an economic factor to the consumer. The benefit is longer life or better quality of life, to be sure, but the economic impact, no matter who pays, is not an economic benefit.

I would suggest that rather than gov't getting involved in all business that might profit from subsidies or transfer paymenets to those with need, that a better approach would be to nationalize all basic industries on which the economy is run! Electric, gas, petroleum, etc. Then, the companies are competing for disposable income on goods and services that should require innovation and a profit motive. There should be profit motive in supplying something as basic as electrical power. This whole country's economy, and the rich folks' cash source, would evaporate in a week if there we no electriciy.

I like your idea, but i think it needs to be specifically targeted toward the fundamental building blocks of a modern economy.
The Professor

[AP]

27. Homeownership is a good thing...

...but I'm not sure the best way to encourage it is a tax subsidy that increases prices for houses and shifts a lot of the wealth created to mortgage lenders and away from the tax base.

You really need to have some market force that offsets the upward pressure on prices that result after you create the tax break.

This is basically the difference between a pell grant and the deductibility of student loan interest.

When student loan interest is deductible, it makes students a little more tolerant of debt and that in turn gives schools room to raise tuition. Who benefits? The Wall St banks that churn those loans into profits. Of course, a Pell Grant does something similar -- but so long as they're only given to people who need them, and so long as schools don't have two-tiered pricing (charge more for poor, less for the rich), Pell Grants won't drive up the prices colleges charge.

When you give a tax break for a payment to a private party, you really need to do something to (1) make sure that prices don't go out of control, and (2) you're not just shifting wealth to Wall St banks.

As an aside, one might think that a home seller benefits from rising home prices -- but not totally. Most of the time, the seller has to turn around a buy something, and if prices are skyrocketing, they're just treading water or falling behind, or exposing themselves to even more financial risk. It's really the banks who benefit the most from skyrocketing home prices.

[ProfessorGAC]

30. No Argument

I don't concur on the impact of tax breaks on the cost of homes. I think you overestimate most people's udnerstanding of finance. Lenders will give you what they want to give you, and they know what you can afford based upon the cash flow differences due to the tax deduction. But, i think fewer people are as tax and finance sophisticated as would be necessary for this to be the motivating factor in overbuying a home.

I completely agree, however, that too many people see a house as an investment as opposed to a dwelling that eventually they will own completely. They then get trapped into the upward price sprial you describe. That does tend to validate my thought that the percentage of sophisticated buyers is not that high. I didn't get trapped into that. I understand finance. Obviously you do to, or you wouldn't even have these opinions. But, i would guess most people don't really understand the details to that degree.

I understand your concern over the pricing pressures caused by subsidies, but if you look at the overall economy, and compare the effects you describe, they're really a very small part. The impact, which may very well be exactly as you describe, would still be tiny.
The Professor

[AP]

33. Re first paragraph: I don' think people understand the tax break when they

buy their FIRST home. But once they're in that home and see how much money they have left over after they get the tax break, they start looking at moving into a more expensive home, and they have the money to do that, thanks to the tax break.

I also think most people appreciate that they get some kind of tax break when they buy a home and that's a big reason people switch from renting to owning a home.

I also think it's important to recognize that we're really three for three in terms of seeing prices (and idebtedness) go up when the government gives a tax break: home prices, tuition prices and health insurance.

Is there even a single example of a tax break for a private purchase that hasn't been accompanied by the increased consumption and increasing prices of that item???

If there is an example, I bet you'll also see that there was some effort to cap prices or the government was a competitor in the marketplace for that item, which held down prices.

As for the effect on the marketplace being small, didn't I read the other day that in CA real estate makes up over 50% of the economy and 1 in every 50 Californians works in the real estate industry and 1 in 200 californians is a real estate agent? I think taxpayers are subsidizing that to a great degree and two big parts of that is mortgage interest deductibility and the other part is the +100% mortage (which, is attractive partly because of the mortgage interest deduction).

[iamjoy]

48. It Is Not The Same Logic

I don't understand the mortgage business. You have demand problems with homes so maybe that's the logic.

But the reason an employer plan is usually less expensive (than say, a private policy) is because it is a group policy. The insurer is covering, "x" people for this group. They know statistically only y% of those people are going to really use the insurance and only z% will have expenses exceeding the premiums. If y or z is greater than anticipated, premiums rise for everyone in the group.

Generally, the more people "buying" into a group health insurance the LOWER the costs are going to be, in general. That's because if there is one person with a catastrophic illness, the expenses can be spread out over a greater number of people. Of course, the more people, the more likely they are to have a catastrophic illness in their group, but insurers also use their buying power to negotiate discounted rates with medical providers.

[mmonk]

54. To be honest

I didn't choose my house based on the amount of tax deduction I could get. Also, my healthcare costs this year were over $30,000 when counting deductable, co-pay and premiums. I ought to get something in return for a system that keeps premium costs high for benefit of the insurers. Frankly, I don't see how I can afford it to keep going up. I would gladly pay a tax and have a government directed system that I could access when I need it.

[AP]

18. By the way way, the Urban Institute is a liberal think tank.

[sendero]

28. I'm having a hard time..

... understanding this guy's point. It has a "Reagonomics", "voodoo economics", "laffer curve" feel to it.

IMHO, nothing short of a single payer system or a system of rigid price controls is going to fix health care in the USA, and even those solutions are not that good.

[AP]

29. I think this guy might agree with your last paragraph.

Giving a tax break for a purchase you make on the free market only encourages the seller to increase the price.

You can't give tax breaks for things like mortgages, student loans and health insurance unless you do something else to stop the otherwise inevitbale increases of prices.

I guarantee you our legislators knew this when they passed these tax bills.

[Bridget Burke]

31. In a sane country, a better solution would be found.

What do you want to bet that the tax break will be erased but costs will NOT be controlled?

[AP]

34. I think the insurance companies are too powerful to let gov't end the tax

break.

They benefit enormously by the government subsidizing their profits, and the Democrats would never want to be the party that removed the tax break -- as this thread shows, people generally don't understand the economics.

[hector459]

32. Outrageous if true! If anything, they should remove the threshold for

taking this deduction and allow people under a certain income to deduct all of their medical expenses and others over that income to deduct 80% of their un-reimbursed medical expenses.

[reprobate]

35. This was a repug talking point a couple of months ago.

Their intent is to destroy the employer based insurance system and force everyone to buy their own coverage which is far more expensive and is not quaranteed issue, but underwritten for medical conditions.

The result will be far more uninsured in this country. Those who can't afford coverage and those who can't get coverage. Imagine a family that pays for individual policies and the father and one child is covered but the mother and other child are excluded medically because of past illness.

Their excuse is that by removing the cost of insurance the employers will me more competitive. More competitive with slave labor in china. What a joke this country has become.

Which way to the barricades?

[AP]

37. These aren't republicans this time.

Pauly said the incentives are "mistargeted." They lower taxes most for higher wage earners and increase the ranks of the uninsured.



"By most definitions of fairness, the patterns of distribution of these differences in their taxes would be regarded as highly unfair and inequitable," he said.



The panel's vice chairman, former Louisiana Sen. John Breaux (news, bio, voting record), asked the experts for more information about the best ways to use tax laws to increase health insurance coverage among those who have none.



"It's the biggest problem, I think, in the country," Breaux said, also calling it "much more difficult that Social Security (news - web sites)."

[AP]

38. More from the article:

Steuerle estimated the subsidies for health insurance stand at $150 billion, projected to grow to $250 billion in several years.



Pauly calculated that those subsidies amount to more than $188 billion. They include tax breaks for employer provided health care, cafeteria plans, flexible spending plans and new health savings accounts.



Taxpayers can also take a deduction if they pay more than 7.5 percent of their income in a year for medical costs not reimbursed by insurance.



The result is that "the richest half get 75 percent of the subsidy. The poorest half make up 75 percent of the uninsured," Pauly said.



He pointed to his own Calvin Klein glasses, purchased with money set aside in a tax-free flexible spending account, as evidence of tax benefits accruing to those with the best coverage.



"I'm grateful to the U.S. Treasury for improving my appearance, but I would not put that high on the list of social priorities," he said.

[AP]

39. And a little more:

Pauly recommended that the tax subsidies for health insurance coverage be limited and combined with a new refundable credit to help low-income and uninsured individuals and families buy coverage.

Steuerle warned that the country's mounting deficits and aging population could make it difficult to create a large, new credit without reducing tax benefits for someone else.

Tax advisers also cautioned the panel not to recommend a poorly designed system that tries to make the current income tax more like a consumption tax by adding new features like large, tax-free savings accounts.

[tsuki]

41. Absolutely. I have a policy that I bought before the Jebster dismantled

Lawton's health plan. No employee of mine can be turned down. The insurance companies want to pick and choose whom they insure so that their profits will skyrocket.

The CEO's aren't making enough. Ha!

[tsuki]

40. Stupid, stupid, stupid. I just got a notice that my company's

health care insurance policy is going up $700.00 on the anniversary date. That is for 3 employees and a spouse. I could do a lot on $2600.00 a month. But, here, if you have insurance, a hernia repair cost with insurance $6000.00, without $15,000.00.

We have a basic policy, with a preferred network. The doctor's and hospitals don't want insurance.

This is one of the most idiotic statements that I have ever read

"the incentives cause people to buy excessive amounts of insurance to lower their taxes"

I would gladly pay 30% taxes on $2600.00 if I could keep $1820.00 in my pocket. Who wants to spend a dollar to save thirty cents?

The GOP is a bunch of stupid idiots.

[iamjoy]

49. I Don't Know Of Anyone Buying Insurance To Lower Taxes

and I work for a benefits company, so I used to help people enroll in their health insurance.

The reasons I heard for people buying the maximum coverage (this company offered different coverage levels where you could have higher premiums for lower deductibles and copayments) was they didn't want to have to worry about having large bills IF they got sick. And this would be perfectly healthy people worrying about this.

Really, if they want to test this they should talk to Human Resources Consulting Companies and have them do surveys of employees and why they participate/don't participate in their plan or chose the coverage level they did. I bet a very small percentage would mention the supposed tax break, be interesting to see how many would think of that on their own vs. if it were on a list (pick or rank from the following reasons).

Sure, the companies get tax breaks for offering coverage, I don't know how much the tax incentive figures into their decision of their offerings. I would just think, however, that most of them do this to be competitive, because employees expect it.

[tsuki]

51. I offer it because I have seen the devastation of those families

that do not have it. Believe me, the hospitals and doctors REAM those without insurance. They pay a minimum of 200% more than people with insurance. But they don't want me to cover my employees because that would mean more in their pockets. It is all about greed. CEO corporate greed.

[iamjoy]

52. Well, You're A Good Person

But I doubt there are many CEOs offering it *only* for the tax breaks, just as I doubt many of them truly care about their employee's health. It's all about being a competitive employer.

But, don't blame the hospitals TOO much (some, but not entirely). The insurance companies negotiate such unbelievable low rates they have to charge non-insured more to make up for it.

Don't believe me, look at an EOB (Explanation of Benefits) sometime. See what the hospital tried to bill and the insurance "allowed." Of course, how much of that is just for show by hospitals, you know, we're going to mark things up 500% so when we give you a 60% discount you think you're getting a "deal." Not all that different than a used car salesman

[reprobate]

43. There is ONLY ONE way to solve the health care financing mess.

The very basis of insurance is that the larger the risk pool, the lower the risk for each individual. That's why group policies thru employers are cheaper per individual than separate policies for each worker.

The only way to lower costs while maintaning quality coverage is to include EVERYONE in the pool, whether it be on a statewide or national basis.

Then make it a tax funded plan. Oh I know there will be screams of 'don't raise my taxes', but you're paying a tax for it now by having it deducted from your pay. at least this way you'd get the same coverage as the CEO of you corporation.

Boy are the american people bumb. They can be led around by the nose with just a few television propoganda commercial.

[Fovea]

47. Completely absurd.

No, really, just absurd, Orwellian, even.

[banana republican]

53. So they Err on the Side of Life??? n/t

[Merlin]

55. This guy is a moron. I'm embarrased to learn he's with the Wharton School.

As an alumnus, I can categorically state that Pauly is off his rocker on this one.

The most rational way to solve the health care crisis is to ENcourage employers to provide health insurance for employees, not DIScourage them.

Eliminating deductions for health care would result in FEWER employers providing it. That's a damn no brainer.

Then there's this:
"He pointed to his own Calvin Klein glasses, purchased with money set aside in a tax-free flexible spending account, as evidence of tax benefits accruing to those with the best coverage."

Good grief! He's talking about those asinine Health Care Accounts the right wing has been pushing like elixir. Of course they are stupid. But deductions for health insurance are not and must remain or even be expanded.