Proposed health tax raises many questions

WASHINGTON--Most employees would receive new tax breaks for group health care coverage under an initiative outlined by President Bush Tuesday in his State of the Union address, but the proposal raises many questions that have yet to be answered, experts say.

Under the proposal, which would require congressional approval, health insurance premium costs would be included for the first time in employees' taxable income. However, employees would be entitled to an automatic tax deduction of $15,000 for family coverage and $7,500 for individual coverage.

If premium costs in employees' group plans were under these caps, employees would come out ahead financially. In fact, the administration estimates that the proposal would result in lower tax bills for the overwhelming majority of employees.

It isn't clear, though, how long those tax breaks would continue. The $15,000 and $7,500 tax caps would be adjusted annually to reflect increases in the Consumer Price Index. Health care inflation historically has run several times the overall CPI, and many employees--unless they opted for lower-cost, less generous plans--eventually would pierce the tax cap.

The proposal does not address numerous questions. For example, it isn't clear how the cost of premiums would be determined for a self-funded plan; or, in a plan offered by a multistate employer to all employees, whether there could be adjustments to the per-capita premium cost to reflect where employees live.

Without such an adjustment, there could be big distortions. Take the situation of an employer with a high concentration of employees in New York, where health care costs are very high, and a small number of employees in Mississippi, where costs are below average. If health care per-capita costs were computed on a companywide basis, the Mississippi employees might face a new federal tax bite just because their employer's workforce was concentrated in a part of the country with high health care costs.

President Bush's proposal is the second time a conservative Republican administration has proposed taxing health care premiums. President Reagan, as part of a broad tax reform measure he advanced in the mid-1980s, proposed taxing employees on employer-paid premiums that exceeded a certain amount.

But the proposal triggered massive opposition from employers and organized labor, forcing the administration to shelve the idea.