Image: Sen. Max Baucus, Democrat-Montana
Pablo Martinez Monsivais  /  AP
Senate Finance Committee Chairman Sen. Max Baucus, D-Mont., center, tells his committee he'd consider taxing health care provided to high-income individuals or taxing the value of extravagant health insurance plans.
updated 5/12/2009 4:19:17 PM ET 2009-05-12T20:19:17

Senators are considering limiting — but not eliminating — the tax-free status of employer-provided health benefits to help pay for President Barack Obama's overhaul plan and provide coverage to 50 million uninsured Americans.

Finance Committee Chairman Max Baucus, D-Mont., said Tuesday that there are no easy options. Senators began grappling with how to finance guaranteed coverage for all Americans, even as independent experts put the costs at about $1.5 trillion over 10 years.

Obama sees a world in which doctors and hospitals compete to offer quality service at lower costs, and the savings help cover the uninsured. Turning that vision into reality remains the biggest challenge for the president and his backers, because hard cash — not just ideas — is required to cover upfront costs of expanding coverage.

The final package is likely to include a mix of tax increases and spending cuts in federal health programs. Among the possibilities: tax hikes on alcoholic beverages, tobacco products and sugary soft drinks, and restrictions on other health care-related tax breaks, such as flexible spending accounts.

But some taxes don't seem to be on the table, such as a federal sales levy to pay for health care or a new payroll tax.

Bucking the president
Congressional leaders say they want to pass legislation in the Senate and House this summer.

On the controversial question of taxing health benefits, Baucus is staking out a position that could put him at odds with Obama.

The president adamantly opposed such taxes during the campaign, arguing they would undermine job-based coverage. Obama's aides now say he's open to suggestions from Congress, even if he criticized Republican presidential rival John McCain for proposing a sweeping version of the same basic idea.

Baucus said he wants to modify the tax break, not abolish it.

"We are not going to repeal it," he said.

Video: Is public option health care best? Baucus suggested that the benefit could be limited by taxing health insurance provided to high-income individuals, although he did not specify at what income levels. He also said that plans offering rich benefits — for example, no co-payments or deductibles — might be taxed once their value exceeded a yet-to-be-determined threshold.

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White House press secretary Robert Gibbs resisted being drawn into the congressional debate. "We're not going to get into a daily scorekeeping of each idea and proposal," he said.

Unfair benefit?
Employer-provided health insurance is considered part of workers' compensation, but unlike wages, it is not taxed. The forgone revenue to the federal government amounts to about $250 billion a year.

Proponents of repealing the benefit say it encourages lavish health insurance plans that only add to waste in the health care system. And they argue that the benefit is unfair, since self-employed people don't get as big a tax break for health care.

Many experts say that Congress won't be able to come up with the kind of money needed to provide coverage for all unless limitations on the health care tax break are part of the mix.

"I don't see how you're going to put a package together ... unless you touch the exclusion," said Robert Greenstein, director of the Center on Budget and Policy Priorities, which advocates for low-income people. In government jargon, the tax-free status of health insurance is called the "tax exclusion."

'Fairy dust'
Obama has proposed to pay for the plan with a 50-50 mix of tax increases and spending cuts. On the tax side, the president would limit income tax deductions for families making more than $250,000 a year, raising $267 billion over 10 years. Baucus said Tuesday that idea deserves consideration.

Video: Sebelius on Obama’s health care plan The ranking Republican on the Finance Committee, Sen. Charles Grassley of Iowa, said lawmakers should try to squeeze wasteful spending out of the system before imposing new taxes. But Grassley ridiculed the health care industry's pledge to Obama of $2 trillion in savings over 10 years through voluntary efforts to hold down costs.

"I'm sure we will be waiting for some time before this fairy dust becomes real gold," he said.

One option for lawmakers would be to codify the industry's cost reduction offer in federal law, giving it some teeth by applying it to federal health insurance programs.

Health and Human Services Secretary Kathleen Sebelius said Tuesday she's confident health industry leaders will make good on their promise. In an interview on NBC's "Today" show, she called Obama's meeting Monday with industry representatives "pretty remarkable" and suggested the administration wouldn't hesitate to call them out if they retreat on the promise to slow spending growth.

Protesters who back government-run health care disrupted the Finance Committee hearing. Police ejected five doctors and nurses after they interrupted Baucus and Grassley at the start of the session.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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