Axing HSAs?

By Grace-Marie Turner

The Tax Reform Panel has caused an uproar among our health policy colleagues for recommending that Health Savings Accounts be replaced by new Save for Family accounts (page 120). What an outrage, our colleagues say, after all we did to get this free-market idea in place!

So here's the story: Taxpayers can put $10,000 a year into these new Save for Family accounts for health care, retirement, education, or a down payment on a home. Earnings grow tax free, and distributions for qualified expenses are tax free. But the problem is that the money going into the accounts is after-tax, not pre-tax, money (like a Roth IRA). Clearly a worse deal than the current HSAs.

So why would they recommend this? Because one of the principles of the panel was to tax income only once. But HSA deposits aren't taxed at all, creating their own kind of distortion in attracting funds that might otherwise go toward other spending.

So what about using the new deduction for health insurance to both buy health insurance and create an HSA? The panel said that individuals should be able to deduct from their taxes $5,000 and $11,500 for families a year for health insurance, whether they buy it on their own or get it at work.

Experts would argue that this $11,500 could be a combination of health insurance premiums and direct spending on health care. But in this new tax system, all of the money would have to be spent in that year to get the deduction. No roll over.

We have commended the panel for getting it right in justifying a cap on tax breaks for employment-based health insurance. And their principle of taxing income only once is sound tax policy. But without some extra help to boost the free-market in the health sector, like HSAs, we are likely to devolve toward more and more government spending. Clearly not an outcome that most of the people on the tax panel would want.

The commission's recommendations have a long way to go before any action would be taken in Congress. If this issue is raised, we will argue that tax policy shouldn't create a new distortion by allowing only immediate spending on health care and health insurance; we should also have an incentive for saving. Allowing some of the $11,500 to be put into a savings account that could roll over to future years gets the incentives right and likely would get a good hearing.

from http://www.galen.org/ccbdocs.asp?docID=843