Do you take a good look at your paycheck stub before depositing money in the bank? Maybe you don't even bother to open the envelope if the money gets directly deposited to your checking account.
When you get your next paycheck, take a closer look. One thing you might notice, though it's not always obvious, is that the health insurance benefits you receive as an employee don't get taxed. President Bush proposed changing that during his State of the Union address last week. Here's what the idea might mean for you.
Who could it help?
If it became law, the proposal would turn your tax-free employer-provided health care into taxable compensation, just like your regular wages. In exchange, you would get a deduction -- $7,500 if you have an individual policy or $15,000 for family coverage -- for health insurance. You wouldn't need to itemize your tax deductions to use it.
According to the White House, this would mean lower taxes for 80% of people who get health coverage through work. That's because you get to take the full deduction, even if your health coverage costs less than $7,500 for an individual or $15,000 for a family. So, if you paid $5,000 for your individual health insurance, you could still take a $7,500 deduction.
This could also be a boon to self-employed people. They can currently avoid income tax on money used to buy health insurance, but they still owe payroll tax. Under the president's new idea, they could get a break on payroll taxes, too.
Who may not be helped?
If you surmised that lower taxes for 80% of people with health coverage through work means higher taxes for the other 20%, you are correct. People whose health coverage costs more than the new deduction would have to pay tax (income and payroll) on the excess, or find less expensive health insurance.
Because health insurance costs vary in each state, people in states like New York and California may be more likely to find their costs are more than the annual deduction.
More people could fall into that category over time. That's because the president proposed increasing the size of the tax deduction each year to keep up with the Consumer Price Index. However, health-care costs have been increasing at a faster clip than that measure of inflation. Each year, more people would face the prospect of paying taxes on part of the health coverage or finding cheaper coverage.
That factor points to the nub of this plan. By making consumers aware of how much their health insurance costs, they may be motivated to seek cheaper coverage. By seeking cheaper coverage, they may help stem the escalating cost of health care. For the average employee, this means getting a lot more familiar with your health insurance.
Will it happen?
Though my crystal ball has a few cracks, I would venture to guess that this change may not happen anytime too soon. Key Democrats, who would have to help it become law, have already declared their opposition. And, it's not often that a major change like this gets passed unless it's part of a broader reform.
But look for ideas like this to keep cropping up for several reasons. One reason is that some economists and policy experts have said that current, unlimited tax breaks on health insurance have contributed to the seemingly never-ending increase in health-care costs.
Also, as health-care insurance costs have risen, the unlimited tax exclusion for employer-provided health insurance has become more expensive for the federal government. Currently, this tax break ranks as the largest one on the books, worth almost $147 billion this year, according to White House budget estimates. It far outsizes the No. 2 tax break -- the mortgage interest deduction (just less than $80 billion) -- and it dwarfs the tax breaks for 401(k) plans (about $40 billion).
Ponder that figure the next time your employer asks you to contribute more toward your health insurance costs. At least you're not paying taxes.
For related Foolishness:
- Make Health Insurance More Affordable
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Fool contributor Mary Dalrymple welcomes your feedback.
