A Good Idea Inside a Bad One

By Matt Miller

In 1992 the first President Bush's budget was at the printer when congressional Republicans revolted. Bush, they were told, planned to fund expanded health coverage by leaping on one of American politics' "third rails": the fact that the value of employer-provided health benefits is not included in employees' taxable income. Making a portion of these benefits taxable, Bush the Elder reckoned, was a smart way to pay for health care for folks who had none. But G.O.P. leaders were apoplectic. Didn't Bush understand that a tax hike meant political death? The uproar was so swift and furious that White House staffers spent the night using razor blades to excise the offending page from printed budgets.

First George W. Bush went to Baghdad when his daddy wouldn't. Now, with the health-care plan the President floated in his State of the Union address, he's literally picking up a page his father wouldn't keep in his health-care playbook. But the son has shrewdly disguised his slow-motion tax increase as a tax cut.

Here's how. To make health care more affordable, Bush wants to create a standard deduction for health insurance like the one offered for dependents. Families with private health plans would have their first $15,000 in earnings exempt from taxes (for individuals, it's $7,500). The idea, Bush argued sensibly Wednesday night, is to "level the playing field" between today's tax-advantaged employer-provided benefits and those purchased outside the workplace, where growing numbers of Americans seek coverage. But Bush would offset these new deductions by taxing employer-provided benefits above that $15,000 (or $7,500) level. The White House guesses that in the first year 30 million people (whose employer plans are richer than the deduction) would see their taxes rise as a result, while 100 million would see their taxes reduced. Yet here's the trick: these numbers would reverse over the next decade, because the value of the deductions will be indexed to rise only with inflation, while health premiums, rising faster, will leave more people facing the new tax.

It adds up to a clever mouthful for a President desperate to change the subject from Iraq and to offer his party a market-oriented angle on an issue Democrats hope to ride into 2008. For those who buy coverage outside the workplace, it's a boon. But Bush's plan isn't a serious attempt to cure what ails health care and might make some things worse.

For starters, Bush's staff says his plan would reach just 3 million to 5 million of the 47 million uninsured. If that's what this White House calls "bold," it's hard to know what "inadequate" would look like. Moreover, there's a real risk that Bush's deduction could effectively bribe healthier workers to flee employer group plans for the individual-insurance market, where cheaper coverage tailored to their health status would leave more cash in their pockets. This could unravel the larger risk pools that keep premiums lower for everyone.

Still, if Democrats are right to dismiss Bush's overall plan as too little, too late, they're wrong to dis his call to reform today's regressive health-tax exclusion. A nearly invisible $200 billion subsidy that tilts its largesse toward executives in high tax brackets and workers who already have rich plans would normally be assailed by liberals as unjust. But because this particular subsidy bolsters hefty benefits negotiated by their union allies, Democrats overlook the inequity. "It's ironic and embarrassing," says Len Nichols, a former Clinton health official now at the New America Foundation. Farsighted Democrats admit as much. Andy Stern, the leader of the Service Employees International Union, and Jim McDermott, a doctor and a Democrat from Seattle on the Ways and Means Committee, tell me that if universal health coverage were being discussed, they would revisit the sacred tax exclusion as a way to help fund it.

Bush's nervy war on our wrongheaded health-tax subsidy will probably go nowhere, but it's destined to be revived if Democrats get a shot at comprehensive reform after 2008. Even a President as unpopular as Herbert Hoover probably had a good idea or two eventually to steal too.