In Order To Reform Health Care, You Must First Reform Tax Code

At her confirmation hearings, Health and Human Services Secretary-Designate Kathleen Sebelius was introduced by a Republican, former Sen. Bob Dole.

The symbolism is obvious: The White House seeks common ground with Republicans to tame health care costs, expand coverage and better the overall quality of American health care.

But if the White House really wants to promote bipartisanship in health reform, it must start in an unlikely place: the platform of Sen. John McCain's failed presidential campaign.

This past month, the White House has suggested that it's open to compromise on taxing health benefits, a core McCain idea — it's a small, but important, opening.

Back in the fall, the campaign of Barack Obama had harsh words for John McCain's health care plan.

Ads charged that the McCain proposal would result in the "largest middle-class tax increase in history." Sen. Joe Biden explained: "It will cost the middle class over $1 trillion dollars in additional taxes. . . . You almost don't believe what I'm telling you, because it sounds so wrong."

Actually, Biden was wrong. Yes, the McCain plan would have taxed health benefits, but the proposal also offered tax credits to families.

By emphasizing the new tax and not the new tax breaks, the Democratic campaign was deceptive.

At this point, fact-checking campaign ads is about as relevant as critiquing GM's fall lineup.

But strip away the partisan rhetoric, and it's important to note the strength of McCain's plan: the recognition that paying for health insurance in pretax dollars must change.

Rising out of wage and price controls in the Second World War, the tax code offers advantages to employers for the purchase of health insurance.

It's an unusual arrangement — a preference, incidentally, that we don't give to any other basic need.

It's also deeply problematic. The resulting system is expensive, costing the Treasury roughly $246 billion a year in lost income and payroll taxes.

It's a massive tax break — and it's unfair because it's given to the wealthiest of Americans, with a quarter given to those earning more than $150,000 a year.

It's uneven: The tax advantages flow to employees of companies that provide benefits, but not to the millions of Americans who are self-employed or unemployed.

Finally, since others (employers) are paying for their health insurance, the tax advantages cause distortions for the whole health care system, since people don't economize their decisions as they do for the other five-sixths of the economy.

And so, the good news: The White House of Barack Obama isn't ruling out tax reform as part of health reform.

In recent weeks, the White House has suggested that it may — just may — be open to reviewing the tax treatment of health insurance.

As Peter Orzsag noted, it's one of several ideas that "most firmly should remain on the table." Christina Romer, chairwoman on the White House Council of Economic Advisers, declines to rule the idea out.

On "Meet The Press," she noted that while the president is still opposed to it, "what (Obama) has said from the beginning is there is no such thing as Democratic or Republican ideas. (There) are just good ideas." Gov. Sebelius didn't go on the record as being against tax reform during her hearings.

Why the vagueness?

The White House is reluctant to embrace an idea that the president trashed just a few months ago.

But both parties can gain here. For Democrats, changing the tax code offers the potential of expanding coverage — a core Democratic idea — without spending new money.

Republicans could be persuaded to sign on knowing that taxing health benefits would help bring people closer to the financial consequences of their health decisions — a favorite cause of the GOP.

For further inspiration, leaders of both parties should read a paper released last year by the Brookings Institution, which noted: "The most promising way to move forward in all three dimensions — coverage, cost and long-run fiscal situation — is to replace the employer exclusion with a tax credit."

The author? Jason Furman, now deputy director of the National Economic Council.

Much separates the two parties. But with health reform, both Democrats and Republicans should agree on changing FDR's accidental tax policies.

President Obama, in other words, should recognize the wisdom of candidate John McCain.

This piece originally appeared in Investor's Business Daily

This piece originally appeared in Investor's Business Daily