President Bush tonight turned the spotlight back on the health benefits tax deduction.

Bush administration officials have complained for years about the cost of the deduction in the notes accompanying administration budget proposals. The deduction will cost the federal government about $147 billion in tax revenue in 2007, or about twice as much as the mortgage interest deduction for owner-occupied homes, officials estimate.

In November 2005, the president’s tax reform advisory panel recommended that the government cap the deduction at $5,000 for individuals and $11,500 for families.

During the State of the Union address, Bush proposed capping the health benefits tax deduction indirectly, by including employer contributions for health coverage in taxable income, then creating a new exemption from income taxes and payroll taxes of $7,500 for individuals and $15,000 for families with either employer-sponsored or individually purchased health coverage.

“For Americans who now purchase health insurance on their own, this proposal would mean a substantial tax savings–$4,500 for a family of 4 making $60,000 a year,” the president said in his address. “And for the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach.”

The proposal also would lower taxes for about 80% of taxpayers with employer-sponsored health coverage, White House officials say in a discussion of the proposal.

The president also talked during the State of the Union address about increasing subsidies for state programs that help low-income residents and sick residents buy private health coverage; expanding the health savings account program, creating an association health plan system, reforming the medical malpractice system and helping consumers get more information about the cost of medical services.

The National Association of Health Underwriters, Arlington, Va., praised some elements of the address, but not the health benefits tax proposal. “I don’t believe the political climate is ripe for consideration of the tax ideas,” says John Greene, NAHU’s vice president of congressional affairs.

America’s Health Insurance Plans, Washington, has issued a statement praising the general idea of changing the tax code.

“We strongly support a level playing field in which individuals can purchase health care coverage with pre-tax dollars,” AHIP President Karen Ignagni says in the statement. “Currently, the tax code fails to assist individuals unless they spend in excess of 7.5% of their adjusted gross income on health care. Enacting common-sense tax incentives for individuals will go a long way toward helping millions secure and maintain the coverage they need.”

Sen. Edward Kennedy, D-Mass, chairman of the Health, Education, Labor and Pensions Committee, has welcomed the president’s interest in health care but criticized the idea of taxing health benefits.

“Taxing health benefits may undermine the good coverage that many Americans already have,” Kennedy said earlier this week.

Other lawmakers who have criticized the health benefits tax proposal include Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee, and Rep. Pete Stark, D-Calif., chairman of the Ways and Means health subcommittee.