Saturday, September 26, 2009

Flexible Spending Accounts

New York Times article on the debate around fleixible spending accounts. I have one via Duke. My wife says Duke has a maximum of $4,000 you can put in each year, meaning that the amount put into it is shielded from taxes and allows all $4,000 to be spent on health care (actually, for us this year, $3,100 is going to our oldest childs orthodontic braces).

Flexible spending accounts figure in the minutiae of the Baucus bill. First, the tax on high premium health benefits (35% on amount above $21,000 family; $8,000 individual; if you had $24,000 then tax is on $3,000, paid by insurance company but certainly passed on and/or benefits will move just below tax; that is the goal of the tax) includes the following:

*employer paid premiums for health insurance;
*employee paid premiums for health insurance;
*total premiums for dental (I have it, but Duke pays none, family pays $100%)
*total amount put into flexible spending accounts.

All this addes to $16,000 for me, below the $21,000....but Duke's benefit levels given my families choices would eventually 'inflate into' this tax.....unless of course health care cost inflation slowed to general inflation, or whatever the tax limit is inflated by.

Back to flexible spending account. Baucus also has provision to cap amount that can be put into the account at $2,500. So, that would mean for me that I couldn't do the total costs of my kids braces this year ($3,100) on a pre-tax basis. In fairness, I could also be putting in $4,000 for life saving drugs, etc. but I am blessed that my family is not now in that situation.

The political question, is it a tax increase to take away a prefential aspect of the tax code?

Here is a cheat sheet:
*(A) If you want to argue against a change in the tax treatment of health benefits, call it a tax increase. If we capped the flexible spending account amount at $2,500, then someone (like me) putting in $4,000 this year, would have $1,500 more income exposed to taxes. It is also the case that this would reduce the deficit ever so slightly, because when I get that tax preference, all the other taxpayers pay for it.

* (B)If you want to argue for it, call it the closing of a tax loophole, that differentially benefits one group of taxpayers compared to others. So, if we capped the tax exclusion of employer paid insurance benefits, it would be the closing of a tax loophole that would reduce the deficit by around $450-$500 Billion dollars over the next 10 years.

Arguing from the (A) perspective point above, it would be a crushing tax increase on the hardworking men and women of America. Arguing from point (B) above, the current tax codes harms the hardworking men and women who don't enjoy this tax preference because they don't have employer provided insurance.

You can make an argument in either direction. [However, the deficit is not theoretical, it actually exists!]. Often arguments will be couched in terms of fairness (it is not fair for one group to get it if another does not), and such arguments will often be refuted with the concept that a given aspect of the tax code, makes society better off on the basis of net benefits, even if some individuals are differentially benefitted.

You could have the exact same argument around: the home interest deduction (this plus tax exclusion of employer paid health insurance premiums are by far the two largest tax expenditures that operate in this way), child tax credits, tax credits for purchasing long term care insurance, making your home more energy efficient, and literally hundreds and hundreds of other (much smaller in tersm of the deficit) smaller examples.

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