Taxing Your Health Care

The Obama administration is scrambling to find new taxes it can impose to pay for its massive agenda, and one thing now under consideration is the taxing of health benefits as ordinary income:

Senate Finance Committee Chairman Max Baucus (D-Mont.) said Obama expressed a willingness to consider changing the existing tax exclusion. The decision would probably anger liberal supporters such as labor unions, but such a tax change would raise enormous sums of money as Congress and the White House are struggling to find the estimated $1.2 trillion needed to pay for health-care reform over the next decade.

“Yeah, it’s something that he might consider,” Baucus told reporters after the meeting between Obama and Democratic lawmakers. “That was discussed. It’s on the table.” Obama had summoned about two dozen senators to the White House to keep up the pressure to enact a comprehensive health-care overhaul this year…
Private-sector businesses spend about $518 billion a year on their workers’ health insurance, benefits that are not taxed. If workers had to pay taxes on their health coverage, it would raise $246 billion in revenue each year, according to the congressional Joint Committee on Taxation…

Nevertheless, the issue represents treacherous politics for Obama, given his attacks on Sen. John McCain (R-Ariz.), who advocated a similar approach during the campaign.

Let's think about that for a moment. As an example, let's say your employer pays $10,000 per year for your health benefits and you're in the 25% tax bracket. Imposing a tax on that previously untaxed "income" will result in an additional tax liability of about $2,500. Unlike your income which has an amount withheld for taxes which keeps you from having to choke up the whole thing at once, there is no withholding on the health benefit (not to say they couldn't add it and further reduce your take home pay). When you figure your taxes you're going to have to come up with that $2,500 somewhere.

Now, to keep it from being completely poison with the voters Obama might try and slap the tax on the employers who are offering the health plan. What do you think will happen next? The employer will find a way for you to pay it. He'll reduce benefits, increase the amount you have to pay, or perhaps quit offering health coverage altogether. That last option would actually be Obama's best case because it force you into the government plan.

This whole health care process is a no-win for anybody who has an existing company-paid health care plan.