Putting tax on medical benefits gains traction

WASHINGTON – A new tax on employer-provided health insurance is emerging as a likely option to finance an overhaul of the nation’s health-care system, key Democrats say, despite opposition from organized labor and possibly the Obama administration.

Critical details have yet to be resolved, including whether to tax the benefits of all workers regardless of income and what portion of their employer-paid insurance premiums to tax.

But the idea won a surprising degree of acceptance during a closed-door meeting of the Senate Finance Committee this week, according to several people present. And once-fierce opposition among House Democrats is softening as lawmakers confront their limited options for raising the estimated $1.2 trillion that will be needed to pay for reform over the next decade.

“There’s a strong sentiment that still exists in the House” against taxing employer-provided benefits, said Rep. John Larson, D-Conn., a member of House leadership who sits on the tax-writing Ways and Means Committee. “But we understand how important it is to get a package through.”

Implementing such a tax would create a tricky political situation for President Obama, who last year spent millions on campaign ads that harshly criticized a similar idea advanced by his Republican opponent, Sen. John McCain of Arizona. But while continuing to express opposition to the proposal, White House officials have repeatedly stated that all financing options are on the table. And some Democrats are already calculating how to explain a reversal.

That task may have been made easier this week when congressional Republicans proposed using the tax to finance their own health-reform blueprint, lending the idea a bipartisan stamp of approval.

According to U.S. Census Bureau data, 177 million Americans received health insurance from their employers in 2007, the most recent year for which data are available. Nearly two-thirds of people under 65 have at least some of their insurance premiums paid by their own employer or that of a family member.

Under current law, those benefits are not taxed as income, one of the largest loopholes in the U.S. tax code. If the loophole were eliminated, congressional tax analysts estimate that the IRS would have collected an extra $133 billion last year alone.