Quick, name the third largest health spending program in the U.S. (and the second largest for the federal government). Give up? It is the tax subsidy to employer-sponsored insurance (ESI). Every dollar I take home in cash wages from MIT is taxed, at a marginal rate of more than 40 percent. Yet if MIT compensates me in the form of ESI coverage instead, I am not taxed at all. The amount of foregone revenue to the federal government alone from this tax break is more than $220 billion per year.

Besides using up an enormous amount of potential federal resources, this tax break has two other unattractive features. First, it is highly regressive: the higher your tax rate, the bigger the tax break, so higher income individuals benefit more than lower income individuals. Second, it causes individuals to purchase excessively generous insurance, since they are buying it with 60 cent dollars.

President Bush has proposed replacing the ESI tax subsidy with a flat individual deduction amount of $15,000 per family. This proposal takes one step forward in that there would no longer be a subsidy to excessively generous insurance, but two steps backwards in that the tax subsidy would continue to be highly regressive, and the proposal would do little to cover the uninsured, half of whom don’t even pay taxes so wouldn’t benefit from a deduction.

But what if Democrats took him up on the challenge and used the money from replacing the ESI tax subsidy more sensibly? In a recent presentation at the Hamilton project, I presented a plan that would replace the ESI tax subsidy with a plan for universal coverage. This plan would set up new purchasing pools so that all individuals could gain insurance on a fair basis even if it was not available from their employers. I find that such a plan could provide universal coverage with over $70 billion in extra funds per year.

Of course, such a plan would produce winners and losers. The winners would be primarily those with incomes below two times the federal poverty line, or families with incomes below $40,000. The losers would be those with incomes above three times the poverty line, or families with incomes above $60,000. Yet we could readily use the extra $70 billion/year raised through this proposal to offset losses to the middle class. Doing so, we could turn the ESI subsidy into a plan that (a) provides universal coverage for all Americans, (b) is a net gain for those below five times the poverty line (below $100,000 for families), and (c) requires no net increase in federal or state revenue raising.

Such a plan would require bold vision and the willingness to take on a well entrenched tax break. Candidates may want to start small with limitations on the ESI tax subsidy (such as those proposed by President Bush’s own tax policy panel). But in this age of fiscal limitations, if we really want to move forward on universal coverage for the 46 million uninsured Americans, it is time to take on the enormous hidden subsidy to employer-sponsored insurance.

This entry was posted on 8.28.2007 at 3:03 pm and is filed under Helping Families, Ending Poverty. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response.