Yet Again, He Gets It Wrong…

I was listening to the news driving into work today about President Bush’s Health Care Proposal. The more I heard about it, the more I don’t like it.

Under this proposal:

  • The amount you pay for health insurance will be deductable — up to $15,000 a year for families, $7,500 for single workers.
  • What your employer pays to provide your health insurance will be listed on your W2 as taxable income.
  • You can deduct the combination of your employer’s health insurance payments plus what you pay from your paycheck, up to the cap.
  • Flexible spending accounts would go away.

Although I think the notion of encouraging more folks to have health insurance is a good one, there are good ways and bad ways to achieve it. How Massasschusetts did it is a one way: mandating everyone to have it, and then providing a state plan for lower-income folks. I’ve heard there are problems with that approach.

The approach proposed by the Prez’, to me, is a bad way. Although it will reduce taxes for some (those who are under the cap), eliminating the FSA for those that use it will have the net effect of increasing taxes. For others (i.e., those sick enough or with more expensive coverage) whose coverage exceeds the deductability cap, it will increase taxes. It is also unclear if the taxable income will be increased during the year due to this. This would result in greater withholding, reducing paychecks, requiring folks to file to get the money back. This is always a bad thing.

Bush believes the plan will lower taxes for 100M people. He didn’t note that the plan would also raise taxes for 30M people, or that with health insurance premiums steadily rising, the initial tax savings could disappear for many middle-class workers as the cost of their coverage rose above the caps. Yes, the deductability cap would be tied to inflation, but health costs are rising far faster than inflation. Further, it doesn’t take into account the effect of eliminating the FSA. Remember: FSA coverage is far broader than “medical”: it includes dental, vision, and some OTC pharmacy costs… not all of which are covered by the plans. With the FSA gone, the deductability of those would go back to a percentage of AGI, which is bad. This is especially significant for those that max out their FSAs (“each of them’s going to need orthodonture…”).

There’s another aspect of deductability: typically, that only works for those that itemize deductions. Many people don’t, and thus won’t achieve the benefit of this. This is especially true for renters and those with relatively simple returns.

Bad, bad idea. Luckily, healthcare experts said that Bush’s immediate proposal faced almost certain rejection by the Democratic Congress. But the ideas may live on, so it may be worth writting your congresscritter.