Sen. Max Baucus and several witnesses talked today about the possibility of Congress limiting the current federal income tax exclusion for group health coverage.

“I know that there is some controversy” about looking at the current tax treatment of health care, Baucus, D-Mont., the chairman of the Senate Finance Committee, said today at a committee health finance hearing.

“Some do not want to modify the current unlimited exclusion for employer-provided health care,” Baucus said, according to a written version of his remarks. “And I agree that we are not going to eliminate the exclusion.”

But the current tax exclusion “is regressive,” Baucus said. “It often leads people to buy more health coverage than they need. We should look at ways to modify the current tax exclusion so that it provides the right incentives. And we should look at ways to make it fairer and more equitable for everyone.”

Congress also should take a look at “tax-preferred health accounts and the itemized deduction for health expenses,” Baucus said. We should try to make sure that those benefits are structured fairly and efficiently.”

Adopting President Obama’s proposal to limit itemized deductions, including health care deductions, is another option, Baucus said.

President Bush engaged in unsuccessful efforts throughout his presidency to limit the group health tax exclusion to pay for his administration’s health finance reform proposals.

James Klein, president of the American Benefits Council, Washington, appeared at today’s hearing to defend the group health tax exclusion.

“The challenge of financing this effort should begin by reducing costs and inefficiencies in the existing system,” Klein testified, according to a written version of his remarks.

Policymakers should be conservative when estimating costs, savings and revenue, and they should recognize that all system stakeholders should share the burden of reform in an equitable fashion, Klein said.

“Lawmakers may be tempted to reconsider the existing tax treatment of employer-sponsored health benefits on the theory it will hold down health costs,” Klein said. “It is hard to imagine that employers or America’s families need any additional incentives to reduce health care costs. We doubt the nation would want to experience diminished health coverage based on such an untested theory.”

John Sheils, an actuary at the Lewin Group, Falls Church, Va., a unit of UnitedHealth Group Inc., Minnetonka, Minn., said excluding employer-sponsored insurance from individual income and payroll taxes will cost the federal government about $297 billion in tax revenue in 2010.

That estimate includes about $173 billion in personal income taxes and about $100 billion in Social Security and Medicare payroll tax payments, Sheils said.

“About 40.5% of all tax expenditures will go to families with incomes of $100,000 or more, while only about 2.3% would go to families with incomes below $20,000,” Sheils said.

A copy of the written version of Baucus’s statement and the witnesses’ written testimony is available here. http://finance.senate.gov/sitepages/hearing051209.html