A little-noticed provision in President Obama’s new jobs bill seeks to tax healthcare benefits for the wealthy, a controversial idea that went nowhere during the healthcare reform debate.
The administration failed to convince the Democratic-controlled Congress last year to endorse limiting itemized deductions to 28 percent for individuals making more than $200,000 a year. Now, with the House in GOP hands, the Obama White House is trying again.
The expansion partly explains how White House budget director Jack Lew was able to claim Monday that the proposal to limit itemized deduction would raise $400 billion over 10 years, when previous iterations would save $321 billion.
An administration official said, “This proposal is part of a balanced deficit-reduction plan that includes closing corporate tax loopholes and asking the wealthiest Americans to pay their fair share. Currently, individuals and families in the 35 percent tax bracket receive $0.35 off their taxes for every $1 in tax deductions and exclusions, including employer contributions to health. This proposal would change the limit to $0.28, making the deduction more in line with what middle class families receive today. No individual earning less than $200,000 and family earning less than $250,000 would be affected by this proposal.”
Taxing employer-sponsored healthcare benefits has long been a priority for liberals because the exemption is the nation’s costliest subsidy.
It is estimated to reduce federal tax collections by $250 billion every year — and it disproportionately benefits richer Americans.
“Employer-sponsored insurance in general is still going to be a great benefit to upper-income people,” said Paul N. Van de Water, a senior fellow at the liberal-leaning Center on Budget and Policy Priorities who has written extensively about the tax treatment of healthcare benefits. “This proposal still means that high-income people get more of a benefit than middle- and low-income people. It’s just capped so the benefit doesn’t continue to rise with income as much as it does under current law.”
Republicans this week have said they are willing to analyze, and possibly support, parts of Obama’s plan. But they have repeatedly balked at increasing taxes.