About one in eight U.S. workers who receive health benefits from an employer -- more than nine million workers -- could pay higher income taxes on benefits as part of a Senate proposal that aims to raise billions of dollars to finance health-care reform, according an independent analysis of the proposal.

A five-page presentation, obtained by FOX Business, was prepared by the chairman of the Senate Finance Committee, Sen. Max Baucus (D-Mont.), who is leading efforts by Senate Democrats to formulate funding alternatives for a reform plan. In the document, Baucus proposes “options to limit allowable tax free health benefits."

Since World War II, when companies facing work-force shortages began offering comprehensive health-care coverage to attract and retain workers, such benefits have been tax-free to employees. Today, more than 150 million workers and their dependents receive health insurance from their current -- or, if retired, former -- employer.
Preliminary estimates from the Congressional Budget Office put the cost of health-care reform at $1 trillion or more over 10 years. 

See the entire Baucus presentation here

According to the document, Sen. Baucus is looking at four ways to tax benefits starting in 2013, when many reform proposals would take full effect:

• Tax benefits of single workers who earn more than $100,000 a year and couples that earn more than $200,000. The presentation cites a previous estimate from the Congressional Joint Committee on Taxation [JCT] that the proposal would raise $161.9 billion over 10 years if the changes were effective on January 1, 2010.
• Tax benefits that exceed a value of $6,182 for a single worker and a value of $15,700 for a worker who also receives coverage for his family. The document cites a previous JCT estimate that the proposal would raise $418 billion over a decade if the changes were effective January 1, 2010.
• Tax those “base” benefits plus 10%, or a value of $6,800 for an individual worker and a value of $17,240 for families. The higher cap would eliminate taxes for some workers. The document says Baucus has requested an estimate, presumably from the JCT, of how much this proposal would generate in new tax revenue with the change effective January 1, 2013.
• Tax base benefits plus 20%, or a value of $7,420 for an individual and a value of $18,840 for families, which would shelter even more workers from tax liability. Baucus also has requested, presumably from the JTC, an estimate for this proposal also effective January 1, 2013.

Most of the value of amounts cited in the presentation is the cost of insurance premiums that companies pay for their employees’ health benefits. But the presentation says the total value calculated for taxation would also include supplemental health plans for vision and dental care, as well as contributions employees make to their flexible spending accounts and health savings accounts, which workers contribute to with pre-tax dollars. Baucus would also adjust benchmarks annually to inflation.

A 2008 survey of employer health benefits suggests more than nine million workers could face new tax liabilities under the Baucus proposals, according one of the survey’s authors. The survey was conducted by the National Opinion Research Center, for the Kaiser Family Foundation and the Health Research and Education Trust. 

The survey, of 1,900 small and large companies, can be found here.

Among other things, the survey identified insurance-premium levels employers paid for their workers’ coverage last year. To analyze variations around national averages, the survey reported higher premiums due to factors such as geography and benefit differences.

Based on the survey, Jon Gabel, NORC senior fellow for health policy and evaluation in Washington, D.C., said that if the Baucus proposal to tax single workers receiving more than $6,182 in benefits were in effect today, about 15% of single workers, or 4.7 million, could face new tax payments -- potentially hundreds of dollars or more per person per year, depending on tax brackets and the size of benefit packages.

Gabel estimated that about 17% of workers with family coverage, or 4.5 million workers, could face new taxes if the proposal to tax employees with families who receive more than $15,700 in health benefits were in effect today. Under the survey methodology, with family coverage defined as a policy insuring four people, the tax could affect benefits for about 18 million people, Gabel estimated.

The survey and the Baucus proposals did not address another 12 million workers who receive coverage for themselves and one dependent, usually a spouse. Presumably any tax proposal would apply to a subset of them as well.

With health care inflation, even more workers could face tax payments by 2013 as premium payments rose. But by adopting higher benchmarks, such as Baucus’ “base plus 10%” and “base plus 20%,” policymakers would narrow the number of workers required to pay taxes, if Congress adopts such proposals. Congress could also limit their impact by combining a benefits level cap with an income test -- such as taxing only single workers who receive $6,182 in annual health care benefits and who earn more than $100,000 a year.

Gabel said most workers will have to ask their employer for benefit information to determine the value of their individual health care packages.

For more information on taxation of health benefits, you can read Center for Budget Policy and Priorities report here  and read the Employee Benefit Research Institute report here. 

The idea of taxing health-care benefits has bipartisan roots. Some conservative economists and Republican policymakers believe health-care costs are soaring faster then general inflation in part because such benefits are excluded from taxable income, encouraging excessive health care spending by consumers. Some Democrats agree.

On May 20, Baucus suggested some ideas for taxing benefits, including capping tax-free benefits at a certain level, in a white paper he released with Sen. Chuck Grassley (R-IA), the top Republican on the Finance Committee. The 41-page paper, titled “Financing Comprehensive Health Care Reform: Proposed Health System Savings and Revenue Options,” can be found here.

During the presidential campaign last year, then-candidate Barack Obama criticized his Republican opponent, Sen. John McCain (R-Ariz.), for proposing to tax all health-care benefits. Under his health-care reform plan, McCain would have used the new revenues to the government to fund health-care tax credits.

But in a meeting with Baucus and other senators earlier this month, President Obama signaled he would not rule out taxing benefits to help finance a reform plan.

“If I'm not mistaken, I can think of at least one Republican off the top of my head that talked about changing the tax benefits for the exclusion,” White House Press Secretary Robert Gibbs said at his daily press briefing on Friday. “I think if I sat at Google for about five minutes I could probably get you several dozen. I think one of the major reform bills that's up there right now that's been written by Sen. [Richard] Burr (R-N.C.) includes, if not a complete ending of the exclusion, some cap of it.”

The Obama Administration has already proposed more than $300 billion in tax increases to pay for reform, mainly by limiting deductions for wealthier families, and proposed more than $600 billion in cuts in Medicare and Medicaid spending.

But NORC’s Gabel said of specifically taxing benefits, “I think it's very difficult to sell. As we know, Americans are almost schizophrenic in their views on taxing and spending. You name it, they think we should do more on it -- spend more on education, more on defense, more on health care. On the other hand, they think taxes are too high and they don't see a contradiction between the two.”

The tax proposals also likely face strong opposition from some of the President’s and the Democratic party’s key supporters -- unions that enjoy more generous health-care benefits won through hard-fought contact negotiations over decades. Apparently anticipating some objections about the possibility of affecting contracts already in place, Baucus has proposed protecting some union benefits by “grandfathering” collective-bargaining agreements existing on January 1, 2013, in his “base plus 10%” and “base plus 20%” options, according to his presentation.

Baucus has not introduced any health care reform legislation in his committee yet. But a separate bill, authored by Sen. Edward Kennedy (D-MA), chairman of the Senate Health, Education, Labor and Pension Committee, includes a “special rule for collective bargaining agreements” that would grant a delay in union compliance with the all provisions of the Kennedy plan. Deferring to Baucus and the Finance Committee, the Kennedy bill does not address taxing benefits or other major financing issues.

On Sunday, a New York Times poll on health-care reform suggested taxing health benefits may not be as politically treacherous as assumed: the Times reported that 57% of voters said they would be willing to pay higher taxes “so that all Americans have health insurance that they can’t lose no matter what.” Just over a third -- 37% -- said they would not be willing to pay such taxes, and 6% had no opinion.

In a press briefing on June 9, Baucus said he was considering either a 50-50 or 60-40 split between taxes and savings to pay for a reform plan. Baucus specifically mentioned a “grandfathering” idea that he said would help mitigate taxes to some people who receive health-insurance benefits and said he favored an income test to narrow the impact as well.

In the House, Democratic leaders announced their own draft reform plan on Friday. But they did not present any options for financing it.

Gabel said taxes on benefits could not only raise some revenue for a new government plan but could also help to reduce health care spending, and thus inflation, as some economists believe.

“People will move from rich benefits where they don't face deductibles to higher deductibles so their premiums are lower, and this will reduce the use of services,” Gabel said. “Also, they may move back into tightly managed HMOs like Kaiser, which have shown they can deliver care at lower cost.”