Sort of Right

September 9, 2009

Sen. Max Baucus this weekend proposed taxing some employer provided medical coverage—the “gold-plated,” “Cadillac” type—to help pay for health reform. Those critical of tax breaks for employer-provided health insurance, which is exempt from income and payroll taxes, are right. The government severely distorts health insurance markets by providing these tax breaks, nudging most workers into getting health insurance from their employer rather than the individual market. And health benefits offered by employers are likely taken out of wages. This has all been written about before.

The tax status of employer-provided health insurance should change. But when politicians like Baucus look at untaxed health benefits they likely don’t see distortions but dollar signs, just something untaxed the rich enjoy. Many policy proposals have focused on ending the tax break for high-earners (who enjoy large benefit packages), sometimes with a cap on benefits that qualify for the tax break. This gives the government more money without solving the distortion problem. The tax breaks for health insurance should be ended altogether (and in a better world the government could then reduce income and payroll taxes given the new revenue).

Read Baucus’s full health reform proposal here.

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