From the August 2009 issue of Ceridian Connection.

Perhaps no single issue has taken on such importance, or has greater power to make or break President Obama's healthcare legislation, than the question of where the money will come from to pay for it. And in the case of healthcare reform, particularly universal coverage, budget estimates are astronomical -- a minimum of $1 trillion in new spending over 10 years.

To his credit, the president has made it clear that he will not sign into law any legislation that is not "deficit neutral" and adds to the federal budget deficit. The economic stimulus program, the bailouts of insolvent financial institutions, federal government investments in GM and Chrysler, and other federal government spending programs have added trillions, not just billions, to Washington's budget deficit. Currently, the U.S. Treasury plans to run up hundreds of billions of dollars of budget deficits -- and these don't even count new spending for Social Security and Medicare!

The reality is that healthcare reform must be paid for either by cuts in other federal health programs, such as Medicare, or higher taxes -- or some combination of both. This issue has confounded lawmakers more than any other.

In the midst of the worst recession since the Great Depression of the 1930s, with unemployment fast approaching 10 percent of the workforce, the public has no appetite for higher taxes. Even giving Congress the benefit of the doubt that half of the $1 trillion cost of universal coverage can be paid for by cutting waste in the Medicare program, that still leaves a $500 billion 10-year hole that can only be filled by higher taxes on someone -- and herein lies the difficulty to financing universal coverage subsidies.

Tax health benefits of employees, employers or insurance companies?
While the two main Congressional committees with jurisdiction over taxes have sifted through the entire Internal Revenue Code to uncover new revenue sources (see Joint Tax Committee analysis of financing options), one idea has emerged as the front-runner: a new tax on high-value insurance coverage.

Under existing tax law dating back to 1954, employee health benefits, regardless of cost, are tax free to employees and deductible to their employers. Tax-free health benefits include employer-paid premiums, employee-paid premiums under Sec 125 cafeteria plans, Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and dental and vision coverage. The more generous the coverage, the greater the tax benefit.

One proposal seeks to raise some $350 billion in additional tax revenue over 10 years by setting a threshold, for example, $17,000 per year, for tax-free employer-provided health coverage. The value of health benefits below the threshold would be tax free; the value above the threshold would be considered taxable compensation, reported on the employee's W-2 and subject to federal income taxes.

Needless to say, the idea of taxing people with health insurance to pay subsidies to people without health insurance has provoked a strong negative reaction -- from labor unions, the White House and members of Congress nervous about facing the voters in November 2010.

To allay these concerns, the Senate Finance Committee appears to have come up with a novel twist on the threshold idea -- to levy the excess-value tax, or "fee" not directly on employees, but on insurance companies or employers (in the case of self-insured plans). Under the new formulation, insurers would pay a surtax on the value of coverage in excess of some limit, possibly $20,000, beginning in 2013.

According to the Kaiser Foundation, approximately only 10 percent of the 165 million people with employer-sponsored coverage are enrolled in family plans with premiums in excess of $17,000 per year. Adding dental, vision and other coverages would bring these plans up to approximately $20,000.

See this important Washington Post article on the pros and cons of taxing health benefits.

It's still too early to tell whether the idea of taxing high-end health plans will fly in this politically charged antitax atmosphere. But there's no question that healthcare reform and universal coverage must be fully financed and that taxes will be a key part of any final legislation. Without a solution to the financing issue, President Obama will follow in the footsteps of President Truman and President Clinton and fail to achieve his number one legislative priority.

Four consensus issues	SPACE	Four roadblocks to reform
Insurance market reform	SPACE	Financing healthcare reform
Creation of a health insurance exchange	SPACE	Saving for out-of-pocket health costs: FSAs in the spotlight
Subsidies for lower income households	SPACE	Public plan option in the health insurance exchange
Support for wellness and prevention	SPACE	Employer mandate