Taxing Health Benefits Would Hurt Poor Working Families More Than The Rich

Cheryl Clark, for HealthLeaders Media , August 21, 2009

Imposing a tax on health benefits, as some in the health reform debate propose, would hurt lower income people much more than it would impose burdens on the wealthy, according to a new study published online this week in the New England Journal of Medicine.

Ending tax subsidies for employer-paid health insurance "would inflict a regressive tax increase, taking a larger share of income from insured near-poor and middle class families than from the wealthy," wrote Steffie Woolhandler and David Himmelstein, family doctors who practice at Cambridge Hospital in Massachusetts. Woolhandler and Himmelstein are also professors at Harvard Medical School and co-founders of Physicians for a National Health Program, an organization of 16,000 doctors and medical professionals who favor single-payer national health insurance.

In fact, it would impose a tax 140 times higher on insured, working-poor families than on Wall Street executives, such as a Goldman Sachs executive insured with his company’s $40,543 health plan, and who receives a subsidy of about $15,367 last year.

In a chart published with their article, they show that federal tax subsidies for employer paid health insurance in 2004 were $953 and $2,116 for families with annual incomes under $10,000 and between $10,000 and $19,999. That represents 18.3% and 13.8% respectively.

However, for those making more than $99,999 (with a mean income of $168,987), the subsidy was $4,498, or only 2.7%.

"Many health economists, ranging from Democratic advisor Jonathan Gruber to the Heritage Foundation, have argued that tax subsidies for employer-paid health insurance encourage over-insurance and are highly regressive, directed mainly to higher income families," they wrote.

"We beg to differ. The subsidies meet the usual definition of progressivity; they taper down (as a percentage of income) as income rises."

They added that the confusion may arise from "the dazzlingly large sums that high-income families gain from these tax subsidies. They report that, according to a 2004 analysis, 26.7% of the $50 billion in federal tax expenditures for health benefits went to 14% of U.S. families with incomes of $100,000 or more. Conversely, the 57.5% of families with incomes below $50,000 received only 28.4% of the subsidies.

"In other words, on average, families whose income was at least $100,000 got $2,780, while those making under $50,000 received $102 to $1,448."

The idea of taxing employer-sponsored health benefits has been a cornerstone of the most controversial provisions in the health reform package. President Obama recently said he is willing to consider the idea, although on the campaign trail he said he opposed it.

Even more recently, however, the idea has lost favor because of the impact it would have on American families who get health coverage through their employers, and would not tolerate what in effect would be a significant reduction in their pay.

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