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Tax Options for Financing Health Care Reform
S everal tax options have been proposed to provide financing for health care reform.
President Obama has proposed restricting itemized deductions for high income taxpayers,
along with some narrower provisions for other reforms or to reduce the tax gap.' On May
20, 2009 the Senate Finance Committee provided a list of options for health-related tax
provisions. They include modifying the tax exclusion for employer-provided health care (by
capping it, limiting it by income, or replacing it with a deduction or credit), revising other tax
provisions relating to health care, increasing taxes on alcoholic beverages, and imposing an
excise tax on non-diet sweetened beverages.2 Individuals testifying at a May 12, 2009 round-table
discussion have also proposed a number of other options.3
The tax proposals differ in their effects on behavior and where the burden falls in the income
distribution. While most taxes rise with income in absolute amounts, the burden relative to
income may fall more heavily on higher income taxpayers (a progressive change), about equally
on all taxpayers (a proportional change), or more heavily on lower income taxpayers (a regressive
change). The limit on itemized deductions increases taxes for high income taxpayers (roughly the
top 2%) and is a highly progressive change. The burden of limiting health-related income and
payroll tax exclusions tends to increase taxes as a percent of income proportionally more in the
middle income brackets, with smaller effects at both the low and high ends of the income
distribution. Excise taxes tend to be regressive and fall more heavily on lower income classes.
Note that the distributional analysis in this report refers only to the financing mechanism and not
to the distributional effects of the entire program, as benefits are likely to favor lower income
families. Thus even with a regressive revenue source the overall proposal might redistribute in
favor of lower income individuals.
This report first reviews the health-related income and payroll tax revisions that comprise the
bulk of the Senate Finance Committee's options, followed by the excise taxes included in that
discussion. The next two sections discuss the provisions in the President's proposal (the limit on
itemized deductions and the base broadening provisions). The final sections discuss other
proposals suggested by the round-table discussion participants.
Eliminating or Capping the Exclusion for Employer
Amounts paid by firms on behalf of their employees for health insurance are excluded from
wages and are subject to neither income nor payroll taxes. These health insurance benefits include
purchase of group insurance on behalf of employees or self insurance, where employers pay
claims. Health coverage may also be selected as part of a "cafeteria" plan where employees
1 These provisions are described and their revenue gains reported in the U.S. Department of Treasury's "Greenbook,"
General Explanation of the Treasury's Fiscal 2010 Revenue Proposals, May, 2009, http://www.treas.gov/offices/tax-
policy/library/grnbk09.pdf. The discussion of the provisions begins on p. 87 and the revenue table is on p. 130.
2 Financing Comprehensive Health Care Reform: Proposed Health System Savings and Revenue Options, Senate
Finance Committee, May 20, 2009, available at
3 Senate Finance Committee, Roundtable Discussion on "Financing Comprehensive Health Care Reform," May 12,
2009. Witness statements posted at http://finance.senate.gov/sitepages/hearing051209.html.
Congressional Research Servicee
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Tax Options for Financing Health Care Reform, report, June 19, 2009; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc809116/m1/4/: accessed November 17, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.