President George W. Bush has rejected a key proposal of his tax reform commission, which would impose a tax on some employer-provided health benefits, said Al Hubbard, the president's top economic adviser.

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The Advisory Panel on Federal Tax Reform, commissioned by Bush to suggest ways of reworking the tax code, recommended taxing workers on health insurance benefits valued at $11,500 or more for a family, arguing the current system encourages expensive and unnecessary "Cadillac'' plans.

"I know the president's not interested in pursuing that,'' Hubbard, director of the president's National Economic Council, said in an interview. Instead, Bush will promote expanding untaxed health savings accounts and increased deductibility of medical expenses, he said.

Bush's decision sidesteps a potential fight as he formulates his health-care agenda, which is emerging as his central domestic initiative for 2006. It may lead to a different battle by adding to the deficit. Proponents of expanding the tax deduction for medical expenses for individuals say it would cost the government $6 billion annually in lost revenue, and say the price may reach $28 billion if their assumptions about the beneficial effects of the proposal aren't borne out.

Avoiding a Fight

Bush will lay out his agenda for the year in his State of the Union address at the end of the month. Dropping the recommendation to tax health-insurance benefits allows the president, fresh from a defeat for his plan to overhaul Social Security, to avoid an election-year confrontation with labor unions such as the AFL-CIO over the potential erosion of worker benefits and with insurers concerned about losing business.

"That is very good news because the discussion in '06 should be about ways to expand, not contract, coverage,'' said Karen Ignagni, president America's Health Insurance Plans, the Washington-based trade group that represents health-insurance companies and health-maintenance organizations.

Limiting deductions for health insurance likely would prompt more companies to drop health-care plans, said Larry Levitt, an economist at the Henry J. Kaiser Family Foundation in Menlo Park, California,

"In the last few years, we have seen fewer employers offering coverage and fewer workers getting coverage through employment,'' Levitt said. "Removing deductibility would have only exacerbated that trend.''

Health-Care Costs

The tax exclusion for employer-provided health care saves Americans about $140 billion annually, government data shows. In addition, Americans deducted $8.6 billion from their taxes for medical and dental expenses in 2003, according to Internal Revenue Service data. Millions of other taxpayers get a subsidy for out-of-pocket costs by paying for expenses from so-called flexible spending accounts funded with pretax earnings.

That makes the cost of insurance and care a potent political issue. Health care ranked fifth -- just ahead of terrorism -- on a list of the most important problems facing the U.S., according to a poll released yesterday by the Pew Center for People and the Press in Washington. The top four were the Iraq, the economy, unemployment and poverty.

Hubbard's remarks are the first time a White House official has commented on Bush's reaction to a specific recommendation from the nine-member tax advisory panel headed by former Senators Connie Mack and John Breaux. The Treasury Department is reviewing the proposals in the commission's Nov. 1 report.

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Source: Bloomberg