I had a revelation tonight at an event about women’s health issues in the Presidential election at the Kennedy School of Government’s Institute of Politics.  One of the speakers was Gail Wilensky – a Senior Health Care Advisor to Senator McCain’s campaign. I asked her a question about how Senator McCain’s proposal to eliminate the tax deduction for employer provided health benefits would effect non-profit organizations since they don’t pay taxes.

Gail Wilensky’s answer really shocked me.  I’ve been doing health policy work for about 20 years, and following the election’s health issues for the last year.  What she said was that it wouldn’t matter whether the person worked for a non-profit or a for-profit company, since the employee would be the one paying tax on the entire cost of their health insurance – whether it was their contribution, or dollars coming from their employer.

This makes sense from the economic theory perspective that what an employer spends on employee benefits (such as health insurance contributions) are equivalent to wages.  However, it also means that under Sen. McCain’s proposal if an individual was having $1,000/year taken out of the pay for health insurance, and their employer was contributing another $4,000/year, then they would have to pay tax on the entire $5,000.  Before tonight, I thought that the individual would be paying tax on $1,000 and the company would have to pay tax on their $4,000.

Bottom Line for the Employee
What this would mean in dollars and cents, is that the individual would pay not only Federal income tax on that $5,000, (and most likely state income taxes too), but if the employer has a Section 125 cafeteria plan for providing health and other benefits, then the employee would now also have to start paying FICA tax on the cost of their health insurance. (And the company might have to pay their share of the FICA taxes too.)  So while people like to talk about the marginal tax rates of 15%, 25% and 28% for middle class wage earners – the effective tax rates would be much higher than those percentages. (And companies could also see an increase in their FICA taxes.)

So, again, I was shocked.  After 10 months of reading about the candidates positions I had been under the impression that Senator McCain’s proposal would have the employer and employee each paying tax on their contributions.  The only solace I can take is that I wasn’t alone in this misunderstanding.  Just last week I’d discussed this with a friend who is a law professor with expertise in employee benefits – and he had the same impression.

Addendum:
Below is the text of an email sent out about this posting by a friend who teaches at University of Central Florida (UCF) .  I have his permission to put the text of his email here. It adds some great personal and real world perspectives.

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Dear Friends,

Michael Miller is a doctor who specializes in medical policy.
Michael’s blog entry about the McCain plan re: health care benefits is a real eye-opener:

I’ll confess that (until I read Dr. Miller’s blog) I hadn’t really understood how the McCain health care plan would effect me.

I work for a state University.  One of the reasons I can work for the salary UCF pays is that UCF pays for most of my excellent health insurance. According to Dr. Miller, if John McCain’s plan passes, the amount that UCF contributes to my insurance will be treated as taxable income.  I’ll owe income tax (and FICA?) on whatever UCF pays for my health insurance. I don’t know how much UCF is currently paying for my health insurance, but nationwide employers are paying on average $8,824 for an annual family health insurance policy.   http://www.nytimes.com/2008/05/01/us/politics/01mccain.html

My insurance coverage is better than average.  Except for the $50 or so I contribute each month and the co-pays when I see my doctor, the coverage I receive costs me very little.  The McCain plan would dismantle this system.  My tax bill would increase by more than the tax credit the McCain plan would offer me.

Under the current law, what my employer contributes to my health plan is tax exempt. Maybe that’s regressive (only people with good jobs get their health care paid for substantially by their employer).  But the  McCain plan is wealth re-distribution that hurts the middle class.   The McCain plan really puts the bite on people who’ve taken low-paying jobs that offer health insurance.  Under the McCain plan, the better your health insurance, the more you’ll have to pay Uncle Sam.

Under John McCain’s plan, the people who will be hurt the worst (as a percentage of income) are union workers and others with lower salaries who’ve been able to negotiate strong health plans.

Best,

Randy