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Recent legislative activity indicates that the issue of taxing health benefits coverage has surfaced once again. The U.S. Congress' Joint Economic Committee released a study on December 17, 2003, on how federal tax policy has influenced the health-insurance market. The study concluded that the current tax exclusion "has created a distortion in the health-insurance market, favoring employer-based health insurance with comprehensive coverage as opposed to individually purchased plans emphasizing protection against major risks."
Committee chairman Senator Robert F. Bennett (R-Utah) called for consideration of alternatives to employer-paid group health plans and greater reliance on consumer-driven options. "Reducing the current scope and scale of the tax exclusion," the report states, "would level the tax playing field for health spending."
During the 1980s and again in the mid-1990s, lawmakers considered proposals to tax health-benefit coverage offered through employers by eliminating or limiting the employer deduction and/or the employee exclusion from income. The proposals were driven in large part by a desire to generate revenues to offset a growing federal deficit.
In response, Delta Dental and others mounted a campaign to demonstrate that dental benefits would be especially hard-hit if health benefits were taxed. They commissioned a study in May 1993 that showed that taxing health benefits would decrease spending on dental care by 25.3 percent, or $9.12 billion. When these proposals surfaced in the past, Delta Dental armed itself with data like these and joined unions, consumer groups and others to block their enactment.
Given the size of the federal deficit, and the current focus on consumer-driven options, it appears likely that health-benefits taxation will again be placed on the legislative agenda.
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