Obama and Congress Clash on How to Pay for Health Care

It has become the trillion-dollar question: can President Obama find that much in spending cuts and tax increases to keep his campaign promise to overhaul the health care system, without adding to already huge deficits? Mr. Obama and the Democrats running Congress are deeply split over the possibilities.

Photo by: Pete Souza President Barack Obama

House and Senate leaders do not like his ideas but cannot agree on alternatives. Other proposals that could reduce health care spending would take too long to show savings for purposes of Congress’s budget scorekeeping, and many would require big investments initially, such as for research into cost-effective treatments.

Meanwhile, special interests like insurance companies, employers and even sugar beet and corn growers are on alert to oppose anything that could hurt them.

Adding to the pressure, Republicans are back to attacking Democrats as tax-and-spenders. Yet they have not proposed how to pay for their own, more modest health care proposals. Nor did they offset the cost of creating the Medicare prescription drug benefit six years ago when they controlled Congress and held the White House. Its projected deficits exceed the shortfall for all of Social Security over the next 75 years, according to the program’s 2009 trustees report.

For some time, lawmakers and lobbyists privately assumed Mr. Obama would not hold the fiscal line for a deficit-neutral bill. Instead, he has reinforced it. Legislation “must and will be paid for,” he said in a news conference on Tuesday.

Worries about the economy hardened Mr. Obama’s resolve, administration officials say. “There’s a concern that if Congress were to pass a big health care bill that was heavily deficit-financed, financial markets could react negatively, with higher interest rates that could deepen the recession,” said Robert Greenstein, the executive director of the liberal Center on Budget and Policy Priorities, which supports the administration’s goal of a deficit-neutral health care overhaul.

Even so, each idea to cut spending or raise taxes has political pitfalls. A review of the options — and how dug in the opponents are — shows just how hard it will be for Mr. Obama to reshape the health system. Here are snapshots of major proposals:

Limit income-tax deductions for high earners. This is Mr. Obama’s main idea for raising revenue, but Congress is not likely to pass it except in a greatly scaled-down form.

He proposed to collect a projected $267 billion over 10 years by making taxpayers in the top income tax brackets, now 33 percent and 35 percent, deduct their mortgage interest, state and local taxes and charitable donations at the 28 percent income tax rate. Democratic leaders immediately objected that that would hurt charities, universities and other entities dependent on tax-deductible donations, as well as taxpayers in high-tax cities and states, including New York City and other places home to Democratic leaders.

Mr. Obama has not given up. He counters that a 28 percent itemized deduction rate for top earners would be the same as under President Ronald Reagan. Just 1.4 percent of households would be affected, the nonpartisan Tax Policy Center reported. The Center on Philanthropy at Indiana University says charitable giving would decrease 2 percent.

Any compromises would raise less revenue than Mr. Obama proposed. One alternative would exempt charitable contributions from the 28 percent limit. That, however, would provoke governors from high-tax states or Realtors and bankers protective of the mortgage tax break to press for exempting the other categories as well.

Another idea would maintain the 33 percent and 35 percent rates for itemized deductions after the Bush tax cuts for the rich expire in 2011, when the top two income tax rates revert to 36 percent and 39.6 percent. That would leave the current break for deductions unchanged, but prevent it from becoming relatively more generous when income taxes rise for affluent taxpayers.

Even that fallback hit a wall in the Senate Finance Committee. The opposition of Senator Charles E. Grassley, the panel’s senior Republican, carries weight with Senator Max Baucus, the Democratic chairman from Montana, who is determined to produce a bipartisan bill. Both men say any tax increases or cost savings should come from the health sector. Their preference is to make the value of workers’ employer-provided health benefits subject to income taxes.

Tax employee health benefits. While House Democrats are opposed, the support of influential senators for taxing some benefits and the huge sums to be raised ensures that this option will be part of the debate. And Mr. Obama does not rule it out, though he opposed such a tax as a presidential candidate and promised that only the top 5 percent of Americans would see an income tax increase under his administration.

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The numbers underscore why this is both the most lucrative and the most controversial among the financing options. Taxing all employer-provided health benefits as income would raise more than $2.5 trillion over a decade — more than twice Mr. Obama’s goal. And employer-provided insurance is the largest source of coverage for Americans, benefiting about 160 million employees and their dependents under age 65.

CONTINUED : Other plans for cost saving

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