Medicare bill has new tax-free accounts

AP | 11/23/03 | MARY DALRYMPLE

[kattracks]

WASHINGTON (AP) — New health savings accounts included in the Medicare legislation would let individuals save, invest and then spend money tax-free.

To avoid all taxes, the dollars must pay for medical expenses. The lure of "tax-free asset accumulation," as advertised by the House Ways and Means Committee, coaxed some conservative Republicans into supporting a vast new Medicare drug benefit.

"I'm just thrilled by it," said Rep. John Kline, R-Minn. "It's fair to say the health savings accounts are what has me most excited about this bill."

Critics contend the accounts establish a tax shelter for the wealthy and set a precedent for future accounts to let affluent families evade taxes.

Sen. John Breaux of Louisiana, one of only two Democrats involved in Medicare negotiations, said the accounts do little to help the retirees that the new drug coverage aims to benefit.

"I don't like them. I think they're bad policy," he said.

The accounts, expected to bring in $6.4 billion less to the Treasury over a decade, would be available to individuals with high-deductible health insurance. The deductible must be at least $1,000 for an individual or $2,000 for a family.

Individuals, their employers or their family members could put away the amount of the annual deductible, up to $2,600 a year for individuals and $5,150 a year for families. People age 55 to 65 could make additional contributions to build a medical nest egg.

Money deposited in the accounts could be invested, then withdrawn free of taxes for insurance premiums, prescription drugs, long-term care services, Medicare premiums and other health costs. Employers would not pay payroll taxes on amounts they contribute as an employee benefits.

An account stays with a person for a lifetime. Upon death, assets can be transferred tax-free to a spouse.

The Ways and Means Committee chairman, Rep. Bill Thomas, R-Calif., said tax-free health spending is not as revolutionary as it may appear because employers already get tax deductions for money spent on their workers' health care.

The appeal of tax-free investing gives individuals incentive to use the new accounts and tax-free withdrawals make the money readily available for health needs, Thomas said.

"The last thing you want to do is have someone have a second thought about spending money on health care because there's a tax consequence," he said.

The next step, Thomas said, is legislation letting those with flexible spending accounts, also called cafeteria plans, deposit money leftover at the end of the year into the new health savings accounts.

Flexible spending accounts let employees set aside pretax dollars for expected health expenses. The funds cannot be invested, and any unspent money must be forfeited at year's end.

Some Republicans long have pressed for health savings accounts as a way to control spiraling health costs, asserting that people will force health care costs down by paying out of their pockets rather than with insurance.

"This is a critical step in reducing our reliance on third-party payers, creating more free market mechanisms in health care. It's extremely important," said Rep. Pat Toomey, R-Pa.

Opponents argue the accounts will increase health costs gradually for many people by drawing young, healthy and affluent people out of the general pool of health insurance into the high-deductible insurance plans.

"If health savings accounts prove popular, as congressional scorekeepers expect, low-deductible insurance will gradually become more expensive or even disappear. That would hurt the low-income and the sick," wrote tax expert Leonard Burman and health expert Linda Blumberg of the Urban Institute, a private think tank in Washington.

As troubling to the opponents, however, is the idea of totally tax-free savings for those wealthy enough to set the money aside.

"From a tax perspective, we think it's a precedent for this kind of tax-free treatment on both the front-end and the back-end, for changes in tax policy related to IRAs and 401(k)s," said Edwin Park, senior health policy analyst at the Center on Budget and Policy Priorities, a think tank cited by Democrats.

Steve Moore, founder of the conservative Club for Growth, thinks that's a great idea.

"I'm in favor of dramatically broadening tax-free savings accounts," he said, proposing that individuals be allowed to establish tax-free accounts for education, child care and other needs.

"These are ways of short-circuiting the left's ability to create new government programs, because if people have enough money in these accounts, they don't need new government programs," he said.

[what's up]

I've looked into an MSA...however, they're not available in Hawaii.

This is a fantastic idea. This will change the whole landscape of health care in our country.

This is the part of the Medicare bill which conservatives have not paid attention to. This is a winner.

[what's up]

As people begin to pay out of their pockets for medical costs (under $1000) we will see health care costs come down dramatically.

Dubya is reforming health care. He is a great President.

[Torie]

From a personal financial standpoint, I love MSA's (I was very annoyed when my Blue Cross plan restructured and ceased to be MSA compatible), and now HSA's (compatible with almost everything with the required deductible, with about double the available deduction as the MSA, and the deduction is above the line, rather than below on your tax return, so it is not subject to the myriad restrctions that attend schedule A deductions, for thost that itemize. However, the loss of revenue to the feds will be many times the estimate ludicrously small number suggested by Thomas of single digit billions over 10 years, many, many, more times, because HSA's are such great deal. Basically you can fully deduct all your medical costs with this without dealing with the 7.5% gross income threashold on your individual deductions schedule A, or alternatively, if you never spend the money on medical care, because you are the bionic man, it is just another pension plan for you.

Taxes are going to be raised I suspect in Bush's second term. You heard it here first. If somehow, Bush dodges that bullet, they will be raised in the term starting in 2008.

None of this spending and tax cutting jihad pencils out. It is not economcially sustainable.

[Torie]

You do know that localizing welfare and redistribution programs would cause both to rapidly collapse don't you? The poor would tend to go where the benefits are most generous, the rich to where the taxes are lowest (presumably with not generous benefits), and the whole financial edifice would rapidly unravel. Sometimes invoking the mantra of localization shortcuts thinking about the real consequences.

[Jim Robinson]

I don't see anything bad about collapsing the federal welfare and redistribution syetems. I think the founders intended for all of this to be controlled at the state and local levels.

[sarcasm]

Did you notice that there is a "revenue enhancement" in this legislation? Medicare beneficiaries with an income of over $ 80,000 will pay a higher premium.

[NeoCaveman]

You do know that localizing welfare and redistribution programs would cause both to rapidly collapse don't you?

And the problem with that is?

[Torie]

As long one knows where one is going, at least one knows where one is going. The idea that politics in America however will ever dismantle the social safety net is however, while not a new idea perhaps, certainly an idea that few are really serious about actually effecting, or think will ever be effected. Rather the task is to somehow manage it all, so the parasite does not kill the host.

[Jim Robinson]

I'd like to get back to what the founders intended. The federal government was never meant to be all things to all people. It was designed to be very limited in scope and power. The state and local governments tightly controlled by the voters is where all of this stuff should be done. We should be paying an excise tax on goods purchased rather than an income tax. The excise tax would have a natural built-in limit (free market) and people would have a better chance at controlling their finances and their tax contributions. And, I suppose, if the liberals really want some money to go to the feds to be redistributed to the states for welfare, they can always donate as much as they want. For example, Barbara Streisand, The Kennedys, Ted Turner, Jane Fonda, et al, could donate millions if not billions to the cause.

[Torie]

You think Mississippi can it alone eh financially? I doubt if Mississippi does.

[NeoCaveman]

Rather the task is to somehow manage it all, so the parasite does not kill the host.

I suppoe there is an amount of poision one could drink without dying, but I'm unwilling to test that theory personally.

[Torie]

The founders certainly had no idea what a modern heterogenious industrial/information age economy with mobile populations and incredibily cheap transportation of goods, ideas, and humans, and very expensive techniques of modern medicine, and very long life spans, and truncated familial networks, and very expensive toys of modern warfare with global reach, would be like. One can't go home again to the Jeffersonion idealized model of the economically self reliant and self sufficient rural yeoman farmer, insulated by vast oceans from the travails of far off lands.

[Torie]

I didn't notice that. All I noticed is the 400 billion scoring, which I think is absurdly low.

[xzins]

We'll never be free again until the income tax is gone

Amen. NRST.

It enslaves through manipulation of the basic necessities and desires of life.

It enslaves through vast power placed in the hands of faulty human beings.

In that I have no choice in the matter, it is an immoral taking in violation of "thou shalt not steal."

[Osage Orange]

You know..I'm just fed up with just "talking about it".

Why don't they/we take a state like HI...and "experiment" on them.

Privatize all the schools...

Or....can the Fed income tax there..and make it "flat".

Or, take the State Public works and make it private.

Oh...I can dream can't I..?

FRegards,

[Torie]

We I think are mixing up tax policy with the issue of whether the federal government needs to be in the business of income redistribution on a national basis, and in setting national policies that have redistributionist consequences, and preclude the lowest common denominator effect emanating from individual states.

It is the same conundrum that is posed with the gay marriage issue. If gay marriage is legal in some states, and not others, and as folks migrate they marriages are reinstituted or dissolved, now would that be a mess or what, both economically and otherwise? Indeed, it would tend to preclude free migration, and direct it in directions that over time would further rend the ties that bind this nation.

[texastoo]

I have a hard time understanding why the Republicans put $1 billion for hospital payments for illegal immigrants into a Medicare Bill. Again, the illegals are getting health care for free this time via Medicare. The illegals are lucky, they get the benefits of Medicare and Medicaid all FREEEEE.

[xzins]

With every purchase that an illegal makes at any store in this country, they would pay tax under the NRST.

As it is, they are off the books in most places they work, and that means there is no taxation. That means a free ride.

[Jim Robinson]

Why do you fear people freely migrating to states where they see more opportunity or better political or economic climates? That's called freedom.

[Torie]

I don't fear migration, in fact I celebrate it, and of course, it can't be stopped anyway. What I am concerned about are state laws so disparate and unmitigated by national law and policy that there are negative externalities to other states, and to the nation as a whole, and to its unity. I guess I am a Federalist. Federalist = Whig = Lincoln Republican = Teddy Roosevelt Republican = Neocon?