FISCALLY FIT By TERRI CULLEN Tax Break or Burden? Terri Investigates Whether Bush Health Plan Would Help or Hurt the Cullens' Bottom Line January 25, 2007
This week President Bush proposed a radical change in the way the government taxes health insurance, in an effort to spur more individuals to buy coverage. The president didn't offer a lot of specifics in his speech, but according to a fact sheet1 released by the administration, his proposal would work something like this: Taxpayers with health-insurance coverage wouldn't pay federal income or payroll taxes on the first $15,000 of income -- $7,500 for singles. That income exclusion is slightly higher than the average cost of health insurance: According to the Kaiser Family Foundation, the annual premium for an employer health plan covering a family of four averaged about $11,500 in 2006, with single coverage averaging slightly more than $4,200. However, for the first time, the cost of employer-provided health insurance would be considered taxable income for the worker. Right now, insurance premiums paid for by employers are exempt from income and payroll taxes. Self-employed workers generally are allowed to deduct the cost of health-insurance premiums from taxable income. Under the proposed plan, if your health-care premiums total less than $15,000, your tax bill should go down. According to the administration, a household earning $60,000 would save about $4,500 in taxes under the proposal, including $2,250 in income-tax savings and $2,250 in savings from payroll taxes for Social Security and Medicare. But if your employer pays for a pricey comprehensive health-care plan, your taxes could rise. As my print colleague Alan Murray noted in his column5 on the Bush proposal, that tax increase would likely be borne by union members and high-paid executives. The proposed tax change was first floated by the president's advisory panel on federal tax reform back in November 2005. One of the panel's assumptions was that workers preferred that their bosses pay for insurance with untaxed dollars, rather than having to use after-tax income to pay for it themselves. The panel also concluded that workers with employer-sponsored health insurance spend more on health care than they would if they had to pay for it themselves, which drives up the cost of health care in general. The panel suggested that a tax incentive to buy lower-cost insurance might result in more consumers having coverage and spending less on health care. I set out to determine what effect the Bush proposal might have on my family's bottom line -- though, granted, there's no guarantee the proposal will ever see the light of day. My family's covered by a health-care plan through my husband Gerry's labor union -- I opt out of my company's health-insurance plan. First, I needed to find out how much Gerry's employer pays into his union's welfare fund annually for our family's coverage. I had no idea what our premiums cost, but I knew it had to be expensive because we have a preferred provider organization plan, or PPO, with vision and dental coverage. It was relatively easy for me to find that number since the cost is detailed in Gerry's labor agreement: $12,376. If you don't know how much your benefits cost, and you want to play along at home, ask your employer or benefits administrator. (If the tax change is implemented, I presume employers will be required to report on your W-2 how much your premiums cost along with your earnings. There's a separate debate over how companies will determine how much an individual's health-care coverage costs -- it may not be as simple as dividing the total cost by the number of employees. But we'll leave that one alone this time around.) I hit my home computer and called up our 2005 tax returns on TurboTax. I added the $12,375 for the health-insurance coverage that would be counted as income under the new plan, then subtracted the proposed tax break of $15,000 from Gerry's annual wages and salaries. That dropped our federal income-tax bill to $27,593 from $28,364, for a savings of $852. So at first glance the new tax plan would benefit our family. But the devil is in the details: Would that $15,000 income exclusion be indexed for inflation? If so, would it be indexed for inflation or health-insurance-premium inflation? In 2006, medical costs rose 3.6%, while the consumer price index rose just 2.5%, according to the Bureau of Labor Statistics. But health-insurance premiums jumped even higher last year, up 7.7%, according to the Kaiser Family Foundation, and premiums are predicted to continue to outpace consumer inflation going forward. A 7.7% increase in health-care premiums would increase the cost of our health-care plan -- and, therefore, our income -- by $13,328 under the proposed plan, shaving about $65 off our hypothetical tax savings. If that continued, within a few years our costs would cross the $15,000 threshold, and we'd end up with a bigger tax bill. Unless the break is indexed to account for rising premium costs, it's easy to see how it might morph into a growing burden similar to the alternative minimum tax, which was never indexed for inflation and is now unintentionally affecting millions of middle-income taxpayers. Once implemented, might Congress become dependent on the increasing revenues generated by the proposed health-insurance tax change, as it has with the AMT? I also have to question whether the White House's proposal would have the intended effect of nudging uninsured people into buying coverage or prompting workers to drop out of expensive employer-sponsored health-care plans and find more lower-cost coverage on their own. Affluent workers would probably stick with their gold-standard health plans rather than accept a lower level of service in return for a relatively small tax break. And my experience growing up in a low-income family makes me skeptical that many of these uninsured workers would run out and buy health insurance because of a promised tax break. (I'm assuming you'd have to pay health-care premiums for a year before seeing any financial benefit from lower taxes.) Middle-income workers would likely benefit most -- if the tax break is indexed for premium inflation -- since many are already seeking out more-affordable coverage on their own because their employers' plans have become prohibitively expensive. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~| Upgrade to Adobe ColdFusion MX7 Experience Flex 2 & MX7 integration & create powerful cross-platform RIAs http:http://ad.doubleclick.net/clk;56760587;14748456;a?http://www.adobe.com/products/coldfusion/flex2/?sdid=LVNU Archive: http://www.houseoffusion.com/groups/CF-Community/message.cfm/messageid:225674 Subscription: http://www.houseoffusion.com/groups/CF-Community/subscribe.cfm Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=89.70.5
