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Health Reform II: Baker Proteges Urge Health Deduction Cap

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Former Treasury Secretary James Baker III has urged tax policymakers to think about a paper that includes a recommendation for a change in the way the U.S. tax system treats employer-sponsored health insurance.

Baker added the paper – by John Diamond and George Zodrow, tax policy experts at the James A. Baker III Institute for Public Policy at Rice University – to the official proceedings for a roundtable discussion on tax reform organized by the Joint Committee Taxation.

Baker, who served as Treasury secretary under President Reagan and as secretary of State under the first President Bush, participated in a panel that also included current members of Congress,money such as Rep. Dave Camp, R-Mich., and Sen. Max Baucus, D-Mont., and past members of Congress, such as former House Majority Leader Richard Gephardt, D-Mich.

Diamond and Zodrow note in their paper that the idea of ending the deduction for employer-provided health insurance has been widely discussed.

In 1986, the last time Congress made a major, successful effort to change the Internal Revenue Code, “this idea was rejected at least in part because it would reduce reliance on employer- provided health benefits and thus increase the pressure to implement government-funded health insurance,” Diamond and Zodrow write. “Although the health care reform bill was recently passed, this issue will likely continue to be a point of contention in the debate about the tax treatment of employer-provided health insurance.”

Diamond and Zodrow recommend capping the group health deduction and indexing the cap to reflect the general inflation rate, rather than to reflect the rate of inflation in health care costs.

“This would gradually shrink the deduction and would raise revenues over time, allowing for a longer and

smoother transition from current policy,” Diamond and Zodrow say.

Sen. Carl Levin, D-Mich., a panelist, said during the roundtable discussion that policymakers tend to make questionable use of the term “special interest” when discussing efforts to eliminate provisions such as the group health tax exclusion from the Internal Revenue Code.

“I mean, for example, the mortgage interest deduction is sometimes called a special interest,” Levin said, according to a transcript provided by the Joint Committee on Taxation. “The same is true of the health care deduction. But they’ve been the basis, the foundation, of the health care system in the case of the deduction and the building of the middle class. I come from Michigan. Without the mortgage interest deduction, I don’t think Michigan could have been among the leaders in creating a middle class.”

Baker did not endorse the recommendations that Diamond and Zodrow made in their paper, but he said members of Congress and officials in the Obama administration must have the political courage to make the tax code simpler and more fair.

“It’s extraordinary difficult because you are, in effect, goring everybody’s ox when you decide you’re going to broaden the base and eliminate loopholes and deductions,” Baker said. “But the only way you can reduce marginal rates is to eliminate loopholes and deductions.”

Members of Congress should try to keep the tax reform debate separate from the debate about how to control the national debt, Baker said.

“If tax reform gets caught up in that, you won’t have tax reform,” Baker said. “You’d better undertake it on the basis that it’s revenue neutral and that it’s distributionally neutral so that you don’t have one set of taxpayers being gored at the expense of another.”

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