GOP plan to replace Obamacare gives big tax break to the rich while sticking it to low earners

A Republican plan to replace President Barack Obama's health care reform law would turn employee health benefits into taxable income and shift more tax savings to high earners.

In a report over the weekend, congressional correspondent Jamie Dupree revealed that buried within an Obamacare replacement bill proposed by the Republican Study Committee in the House is a provision that would create a standard deduction for health insurance (SDHI) of $7,500 for individuals and $20,500 for families.

To pay for the deductions, the Republican plan would remove the tax exemption for employee health care, instead treating the benefits as taxable income.

The plan differs from the Affordable Care Act, which would only tax so-called "Cadillac" health insurance plans with annual premiums exceeding $10,200.

In a recent column, Timothy Jost of the Health Affairs Blog explains why tax deductions can be problematic:

The value of the proposed deduction in the AHCRA would be inversely related to income, as all deductions are. A millionaire in the 39.6 percent tax bracket would receive almost $3,000 in income tax reductions for purchasing individual coverage and over $8,000 for purchasing family coverage. An individual in the 15 percent bracket would receive a maximum of $1,125 in tax reduction for an individual or $3,075 for a family. An individual without earned income would get no help at all. All individuals who had income subject to payroll tax would additionally receive a reduction in their payroll taxes (The payroll tax reductions would presumably reduce the funding of the Medicare and Social Security trust funds.)

Most individuals with low incomes would not be able to afford coverage with this level of assistance. Moreover, low-income individuals would not have the capital to pay premiums for health insurance until they realized the deduction at tax filing time. Finally, they would get no help with cost sharing unless they had enough money to save through an HSA.

And because the deductions are not adjusted for geographic variations in cost, Jost says that companies "with older or less healthy employees, or who are located in high-cost areas of the country, may well conclude that the deduction is not generous enough to make health coverage feasible and drop coverage."

"This would leave employees to the individual market, where they in turn would not be able to afford coverage," Jost warns.