Why are your health insurance premiums tax deductible if paid by your employer, but fully taxable if you pay them yourself? This dichotomy has been part of our nation’s tax code for far too long. Now, President Bush is proposing to change it.
The Bush proposal, if enacted by Congress, would allow a federal tax deduction of $7,500 for individuals and $15,000 for families who purchase health insurance. Those same limits would apply to insurance purchased through employers. Premiums above those limits, whether purchased individually or through employers, would be taxable.
With fewer and fewer employers able to afford to provide health insurance as an employee benefit, individuals have been forced to pay much higher after-tax costs to provide it for themselves. Now, that extra cost may disappear for most Americans.
The fact that health insurance is provided by employers at all is something of an historical accident. Our economy would be better off if workers didn’t have to worry about losing their health insurance when they consider changing jobs.
Making individual premiums tax deductible may open the door for further reforms that help get employers out of providing health insurance altogether. Employers should not have to decide what portion of employee compensation goes toward insurance premiums versus cash wages. Workers can make those decisions for themselves.
