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Tax on Health Benefits Coming?

By Caleb Groos on June 29, 2009 | Last updated on March 21, 2019

A question dominating much of the debate about health care reform is how to pay for it. One idea on the table, which business owners should watch, is to tax at least a portion of employment based health coverage.

President Obama and Congress are currently attempting to sort out details large and small about what type of health care reform we may see, and how we will pay for it. No whehter we  see a robust "public option," fully private insurance, or any variants in between, universal health coverage for all Americans remains a primary goal. All sides agree that this will cost much money, even if reigning in health care costs over the long term proves feasible.

As detailed by the New York Times, several ideas of how to pay are battling it out. They include:

  • Limiting income tax deductions for high income individuals;
  • Taxing a portion of health care benefits received by employees;
  • Spending less on Medicair; and
  • Expanding "sin" taxes on purchases like liquor and cigarettes.

The second option -- taxing health benefits -- has gained ground with some influential Senators, including Max Baucus, Chairman of the Senate Finance Committee. It would affect small businesses that offer (or wish to offer) health benefits to their employees.

Currently, employer provided health benefits are not taxed. If Senator Baucus and other supporters succeed, our health care overhaul could include taxing a portion of health care coverage received by employees. Under Sen. Baucus' proposal, as reported by Bloomberg, employees would be taxed for the amount in health care coverage they receive beyond the coverage provided to federal government employees (currently $13,000 per year).

If, for example, an employee received a plan valued at $17,000, they would owe taxes on $4,000 of their health benefits. Others have proposed $15,000 or $17,000 as the baseline above which benefits would be taxed.

Proponents of funding healthcare reform through benefits taxation see it as a potential source of large revenue that could be put toward universal coverage. They also argue that taxing more expensive plans would target the higher earning employees who normally receive more robust benefits plans.

Opponents claim taxing overpriced health coverage would simply punish employees. Further, they argue it could cause even fewer employers to offer health care benefits to their employees (though, of course, employers may be facing some strong persuasion to offer coverage).

Needless to say, small businesses and their employees will be watching for details of any revamped health care system, and for how it will be funded.

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