President Bush Proposes Changes In Health Insurance Taxation

In his State of the Union address delivered on January 23, President George W. Bush proposed limiting the tax deductibility of employer-sponsored health care benefits, while providing a new tax break for Americans who purchase medical insurance on the individual market. The president also proposed channeling federal funds to states to assist them in offering basic private health insurance to the poor and sick.

"When it comes to health care, government has an obligation to care for the elderly, the disabled, and poor children. And we will meet those responsibilities," President Bush told Congress. "For all other Americans, private health insurance is the best way to meet their needs. But many Americans cannot afford a health insurance policy."

To help alleviate this problem, the president said he is proposing a new standard income tax deduction for Americans who purchase health insurance on the private market of $7,500 for individuals and $15,000 for families. But the plan would also turn employer-provided benefits, which employees currently receive tax-free, into taxable income. Participants in employer-sponsored health plans would be entitled to deduct the value of their benefits up to the new standard deduction limits, but for the first time, benefits that exceed these fixed amounts would be taxed.

Under the president's plan, all Americans with health insurance, regardless of the source, would be entitled to claim the full deduction, even if the cost of their insurance coverage falls below the upper limits. According to Bush administration estimates, the proposal would result in lower taxes for 80% of participants in employer-sponsored plans. However, future increases in the proposed caps of $7,500 and $15,000 would be tied to inflation, not to the actual increase in the cost of health insurance premiums.

Discussing his proposals at a roundtable discussion in Lee's Summit, Missouri on January 25, President Bush said he believes one way to encourage consumers to make the right health care decisions "is to take the inequities out of the tax code."

The president added that the new deductions "will help people who are insured or on the verge of being uninsured" to purchase health insurance, while encouraging the development of an individual market.

In addition to calling for changes to the tax code, President Bush also announced an initiative to provide federal funding to states that offer citizens access to basic, affordable health insurance. The funding would be used to help people with lower incomes or health problems pay for private insurance.

The president's health care plan met with immediate resistance from Democrats in Congress. They argued the proposed deductions would primarily benefit wealthier Americans who already have individual insurance policies, while failing to encourage uninsured people with modest incomes to purchase insurance. In addition, critics charged, removing incentives for employers to offer health benefits could erode existing employer-sponsored coverage.