Vonie Long and Joe Pitts, October 13, 2009

When the House and Senate first began thinking about how to pay for health insurance reform, among the first suggestions was a tax on health benefits. This is a terrible idea. The outcry was so loud that Congress quickly moved on to other ideas. But now the tax on benefits is back.

The Internal Revenue Service taxes your income and compensation, including salary, tips, and investment dividends. What it does not tax, presently, is the value of any health insurance your employer provides you. Even though this benefit may be worth thousands of dollars a year, the IRS doesn’t treat it as income and does not tax you for it.

Facing a price tag somewhere between $900 billion and $1.6 trillion, Congress is eager for more money, but facing resistance wherever it looks. This is no surprise. People don’t generally like to part with their hard earned money.

The solution, it appears, is to tax only the most expensive health insurance policies--so-called "Cadillac" plans. While the tax is levied on insurance companies, those companies will immediately pass those costs on to their customers. Employers will then be forced to reduce the benefits they provide their employees, either by cutting the quality of coverage or by forcing workers to pay more out of pocket.

Proponents argue that these policies are held by rich people who can afford it. But that isn’t always true. A great many middle class Americans work for companies that offer generous benefits. For example, many unions have successfully negotiated generous health benefits, sometimes in exchange for lower wages. These workers may have good health insurance, but that in no way makes them rich enough to afford a new 40 percent excise tax.

Taxing health benefits is also simply a bad idea. We don’t tax health benefits for the same reason Pennsylvania doesn’t levy its sales tax on food and clothing: these are necessities of life, and you should not be penalized for having them.

Taxing "Cadillac" plans will also, inevitably, lead to taxing everyone’s benefits. Washington has an unquenchable thirst for revenue. Once Congress gets its foot in the door of taxing health benefits, it will be simply a matter of time before everyone’s benefits are taxed.

The lessons learned from the Alternative Minimum Tax should be remembered here. First enacted in 1969 to insure that a small number of super-rich families couldn’t avoid paying taxes, the AMT has grown to cover one in five Americans. A similar outcome is possible and even likely here, given the rate of medical inflation and Congress’s unending search for more revenue.

Last week the Congressional Budget Office said the Senate Finance Committee’s bill would not only pay for itself but also reduce the deficit by a small amount. That sounds like good news, until you stop to think that the $829 billion price tag has to come from somewhere. The Senate bill pays for it by increasing the cost of health insurance for millions of Americans. This doesn’t sound like "reform" to us.

For health reform to be meaningful, it should reduce--not increase--the cost of insurance for everyone.

Vonie Long is a member of United Steelworkers Local 1165 in Coatesville PA. Congressman Joe Pitts (R-PA) represents the Chester, Lancaster, and Berks counties.