Dubya’s health insurance tax prescription

GWB, the president who has staked his legacy, at least in the early years, on tax cuts, is going to actually propose a tax increase during tonight’s State of the Union address.

Of course, for every politician, presentation is paramount. Based on the preview offered during his regular radio address on Saturday, Dubya will begin with the more politically palatable part of the equation: a deduction.

He’s recommending a new standard deduction for the purchase of health care coverage. Under the plan, families who purchase health insurance would be eligible for an automatic deduction of $15,000; the threshold is $7,500 for individuals. The tax break would be above-the-line, meaning that you don’t have to itemize to take it. 

If the purchaser opted for a plan with an annual cost lower than that, the taxpayer would get to pocket the difference. For example, a family with a $10,000 plan would still get to claim the full $15,000 deduction.

According to Katherine Baicker with the White House Council of Economic Advisers, the plan would "level the playing field" between those who get insurance at work and those who purchase health care coverage themselves.

But Dubya also has become a bit more conscious of prices of late. So to pay for this new deduction, he’s proposing that workers who get "overly expensive, gold-plated" health coverage via an employer-provided plan pay taxes on the cost of the benefit above the proposed threshold for the tax break.

That would mean an employee taking a $7,500 health care standard deduction and covered by an $8,500 health plan, must pay taxes on the $1,000 difference.

Officials estimate that around 30 million workers have employer-provided policies exceed the cost threshold. On the other side of the health coverage spectrum are around 47 uninsured Americans.

Winners and losers: As the president’s own people acknowledge, there will be some winners and some losers under the proposal, which would not take effect until 2009.

One of the winners if the plan proceeds, which is very far from happening given the composition of the current Congress, would be Health Savings Accounts. The IRA-like medical accounts have long been a favorite of the president, who contributes (as does his wife, according to the couples annual tax returns) to an HSA.

Some HSA enhancements already were included in last year’s Tax Relief and Health Care Act. Use of these medical accounts would grow under Dubya’s deduction plan, since the proposal favors the purchase of lower premium, high-deductible plans that are typically paired with HSAs.

State steps already underway: California and Massachusetts already have jumped into the health care coverage pool, offering ways to make basic health insurance policies available to the poor and those who have difficulty finding insurance from any source.

Arnold tells you (literally; ever the actor, the Web page includes a video) about his plan here.

The California proposal is closely modeled after the Bay State’s landmark law enacted last spring. This National Public Radio story looks at how the two state plans match up.

Maximizing existing medical tax breaks: Any health care coverage changes are likely a ways away, but we do have current tax breaks to help cover medical costs.

This story suggests some expenses you can use to reach the 7.5 percent deductibility threshold if you want to claim itemized medical deductions. And a flexible spending account is still a great way to recoup costs that your workplace medical policy doesn’t cover.

Presidential blasts from the past: Interested in an historical basis for the State of the Union? The American Presidency Project has previous speeches, including this very first one from the original George.