Taxes on healthcare benefits?

Faced with mounting budget deficits and the enormous cost of overhauling the nation’s healthcare system, Democrats and Republicans on Capitol Hill are expressing increasing openness to an idea that once seemed unthinkable: putting taxes on some healthcare benefits.

The idea of taxing medical insurance benefits has long worried many lawmakers, who are concerned that new taxes could jeopardize the employer-based health system most Americans rely on.

Even now, the idea is fiercely opposed by many in Congress and in organized labor. But House and Senate lawmakers now crafting legislation to cover some 46 million uninsured people as part of a sweeping health overhaul are viewing the taxes as something that could be part of a grand compromise, according to senior lawmakers and staff in both parties.

“Members of Congress are seriously looking at the way health insurance is handled for tax purposes,” House Energy and Commerce Committee Chairman Henry A. Waxman (D-Beverly Hills) said this week. Waxman, a leading congressional liberal and ally of Speaker Nancy Pelosi (D-San Francisco), is helping to write healthcare legislation in the House.

Senate Finance Committee Chairman Max Baucus (D-Mont.), who is drawing up legislation in that chamber, also said there is growing interest in examining whether all health benefits should be tax-free.

“People know we have to fund the system,” Baucus said in an interview, noting a change from the fall, when he suggested consideration of the tax break in his health plan. “There are going to be trade-offs, give-and-take among every group.” So far, congressional leaders have been very guarded in their comments about taxing benefits and have revealed no details publicly.

But the discussions thus far have focused mainly on taxing high-income workers or those with expensive health packages.

Increasing interest in the idea comes at a time when several senior officials in the Obama administration, including the president’s influential budget director, have signaled possible support for the idea.

A number of Republicans also are interested in looking at the tax break. “That’s a large pot of money that could be used to create access to healthcare,” Sen. Lindsey Graham (R-S.C.) said this week.

American workers currently pay no taxes on the value of health benefits provided by their employers, an arrangement that is the foundation of the country’s employer-based healthcare system.

For decades, that system -- which allows employers to deduct the value of the health benefits on their taxes -- encouraged businesses to provide workers with health insurance. More than 160 million workers get their insurance through work. But because Americans who buy their own insurance with after-tax dollars do not get a similar tax break, the system has been criticized as unfair

Some also contend the tax breaks provide little incentive for employers or employees with the most generous plans to control costs.

Additionally, the tax break has been costly, depriving the federal government of $246 billion in potential tax revenues in 2007, according to the congressional Joint Committee on Taxation.

As a presidential candidate, Sen. John McCain (R-Ariz.) proposed eliminating the tax break and instead giving Americans tax credits to buy insurance on their own, a concept long favored by many Republicans.

That has always been controversial, however, particularly for labor unions, which have often negotiated better health benefits for their members in lieu of higher wages.

As a candidate last year, Barack Obama pilloried McCain, accusing him of threatening to take away Americans’ health coverage.

Now, however, Obama and his congressional allies are under pressure to find ways to pay for their ambitious healthcare agenda, which by some estimates could cost more than $1 trillion.

Democrats and Republicans on Capitol Hill have already rejected Obama’s proposal to cut tax deductions for taxpayers making more than $250,000 a year, which the White House estimated could generate about $318 billion over 10 years.

And although many lawmakers argue that creating a more efficient healthcare system could ultimately save money, most agree those savings are years away.

“Unless someone can write a really big check, there really is no other source of money that we can tap,” said Len Nichols, an economist who heads the health policy program at the New America Foundation, a Washington think tank.

Peter R. Orszag, an influential advocate of healthcare overhaul who now heads Obama’s Office of Management and Budget, worked extensively on ways to replace the tax break when he directed the Congressional Budget Office.

For years, Orszag collaborated particularly closely with Sen. Ron Wyden (D-Ore.), who has sponsored legislation to overhaul the way health benefits are taxed as a way to achieve universal coverage.

Wyden’s bill -- co-sponsored by Sen. Robert F. Bennett (R-Utah) -- also has the support of several Republicans and has drawn interest from the Service Employees International Union.

Few believe that there is sufficient political support for scrapping the tax break for employer-provided health coverage entirely.

But Baucus and others are discussing ways to cap its size.

One possibility under consideration would allow American workers to receive a certain amount of health benefits tax-free, but pay taxes on any benefits above the cap. Such a proposal would hit workers with more generous coverage plans the hardest.

Another possibility would tax health benefits only for wealthier workers by basing the tax on workers’ incomes instead of the value of their benefits.

That concept seems likely to generate more support among Democrats.

“I don’t want to penalize someone who has good healthcare now and is a middle-income person,” said Sen. Debbie Stabenow (D-Mich.), who nonetheless said she might support an income-based cap. “That is a possibility,” she said.

Said Waxman: “Nothing would be done that would undermine the foundation of the employer-based healthcare system.”

Many lawmakers remain adamantly opposed to taxing any health benefits, however.

“It was a bad idea when John McCain proposed it. And it is a bad idea now,” said Rep. Mike Ross (D-Ark.), a leading centrist.

Labor leaders are also mobilizing against any proposal, arguing that reducing tax incentives for health coverage could discourage employers from providing coverage.

On the other side of the aisle, some Republicans are wary as well. Charles E. Grassley of Iowa, the senior Republican on the Senate Finance Committee, said no tax on health benefits would pass without Obama’s blessing. “It’s not going to be done just by Congress,” he warned.

But talks are continuing. “Everybody is still wrestling with it,” Bennett said. “We’re going to have to thrash it out.”

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noam.levey@latimes.com