Taxing health benefits may fall short

Baucus, key senator on taxes, suggests many would not be affected by a cap on tax-free health benefits. If that's so, the money has to come from someplace else.

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By Jeanne Sahadi, CNNMoney.com senior writer

max_baucus_1.03.jpg
Sen. Max Baucus is expected to offer bill in coming days that will offer ideas on how to pay for health care reform.
Health Tax Savings
Employer contributions to workers' health insurance costs are not subject to income and payroll taxes, a benefit lawmakers may soon limit. Here are the tax savings realized in 2008 as a result of the exclusion.
Income (AGI) Average savings
Overall average $2,868
Less than $10K $635
$10K-$29K $1,952
$30K-$49K $2,457
$50K-$74K $3,095
$75K-$99K $3,900
$100K-$199K $4,481
$200K-$499K $4,728
$500K and up $4,467
Source:Joint Committee on Taxation

NEW YORK (CNNMoney.com) -- Americans who want to follow how the health care debate could affect their tax bill should focus on one man in the next week: Max Baucus.

The Democratic senator from Montana is leading the charge on brokering agreements and has promised to deliver a draft of a bill on Wednesday.

As chairman of the Senate Finance Committee, he's the lawmaker who'll have the most influence over how Washington pays for reform. One of the main ways under consideration: taxing a portion of some workers' health benefits.

Lawmakers want to cap what's called the health care exclusion. That's the amount of money an employer contributes to a worker's health insurance costs.

Right now, the entire contribution from the employer is treated as tax-free to the worker. Under the plans being considered, workers whose employer contributions don't exceed the cap wouldn't be taxed.

Until Congress decides what the cap would be, it's impossible to say just how many people would be affected.

Baucus offered some guidance last week. He indicated that the cap could be tied to the basic health plan for federal employees. He said the cap would be set at "a high enough level so it won't affect very many people," according to Tax Analysts. Baucus also signaled that the provision might not go into effect right away.

Here's the rub: If it won't affect very many people, then it won't go as far in helping to pay for health care reform.

Figuring out a way to pay for health care reform is critical. The cost is estimated at a cool trillion or so.

The Joint Committee on Taxation, a key congressional body, has estimated that a cap based on a standard option plan in the federal health care network could raise $418.5 billion over 10 years.

But if the cap is set above the value of that standard option, or if limits are placed on the cap's reach, the amount of revenue raised would be reduced -- in some cases considerably.

For instance, the JCT estimated that if the cap based on that standard option only applied to singles with adjusted gross incomes of more than $100,000 (or couples with more than $200,000), it would raise only $162 billion over 10 years.

Here's another tricky issue: Federal budget deficits.

Lawmakers say they are committed to enacting health reform so it does not add to the federal deficit over 10 years.

One solution would be to cap the exclusion in such a way that it doesn't capture much revenue in the early years but raises considerably more at the end of the 10-year window, said Howard Gleckman, editor of the Tax Policy Center's TaxVox blog.

In other words, it could be set up in such a way that it wouldn't affect many people initially but could catch them later on.

The key will be whether and how the cap is set to increase annually.

If the cap is indexed to inflation, an increasing number of people could be subject to it since medical costs grow faster than inflation. And if it's not indexed at all, that would eventually subject the greatest number of people to a tax on a portion of their health benefits.

Where other money may come from

In the end, it is still likely that taxing the health care exclusion may not be enough to pay for reform. Lawmakers would have to come up with other "pay-fors."

Not all of the money will come from higher taxes.

Indeed, Baucus has indicated there might be a 50-50 or 60-40 split between taxes and reduced spending measures to pay for reform, according to Tax Analysts.

President Obama has already proposed about $266 billion worth of savings in his budget that could be devoted to health reform and proposed another $313 billion in his weekly address on Saturday.

But lawmakers may have to seek out other tax revenue measures on top of that to pay the piper. What they'll choose is still in play.

If they're desperate enough, lawmakers might take a second look at a proposal Obama made in his 2010 budget three months ago.

He called for a limit on itemized deductions that high-income taxpayers could take.

Instead of using their top income tax rate to calculate the value of a deduction, single filers making more than $200,000 and joint filers making more than $250,000 wouldn't be allowed to reduce their tax bills by any more than 28% of a given deduction. That's below what the top two tax rates would be in 2011.

The JCT estimates that such a measure could raise $269 billion over 10 years.

The problem is Obama's proposal was almost roundly rejected by Democrats and Republicans alike.

The limit would mean the value of popular deductions -- such as mortgage interest and charitable contributions -- would be reduced for high-income filers. So expect the lobbyists for related industries to pitch a fit. To top of page

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