Baldwin & Pocan - misguided efforts on taxation of domestic partner benefits

Wisconsin's last budget included the extension of health benefits to the unmarried partners of state employees. The program is about to go into effect and some are finding that the new benefit carries with it higher costs since these benefits are treated as taxable income by the federal government.

The Wisconsin State Journal reports that US Representative Tammy Baldwin (D-WI2) is working to end the taxation of these benefits at the federal level:

Democrats in Congress like Baldwin are pushing to give unmarried couples like Merry and her partner similar treatment for their health benefits under federal tax law as married couples. The proposed change is part of the House version of the health reform bill but not the Senate version and is also in separate legislation in the House....

"This is a critical step toward ensuring health care for all," Baldwin said in a statement.

Preferential tax treatment of health benefits contributes to their continued high rate of inflation. The tax on Cadillac health plans in the Senate reform bill is an acknowledgment of this. An effort by Baldwin and others to expand the pool of benefits receiving tax exempt status would only worsen the problem. Perhpaps though, cost control is not central to this undertaking.

Obviously, supporters of Baldwin's efforts may claim that this change would simply equalize treatment of benefits. If equality is a main concern, I suggest that Baldwin turn her attention to an even more glaring discrepancy when it comes to taxation of health benefits here in Wisconsin: The tax treatment of contributions to health savings accounts.

In Wisconsin, there is no deduction allowed for employee contributions and employer contributions to the employee's HSA are taxable as income. So an employer's contribution to an insurance premium is not taxable. However, if an employer switches to a high deductible plan and, because of the lower premiums, decides to contribute cash directly to an employee's HSA that money is taxable. How's that for inequality in taxation of benefits?

In terms of the number of people affected, the HSA taxation is clearly a larger problem. The State Journal noted that, "1,000 state employees in all have signed the affidavits, suggesting they will seek some benefits." According to the insurance industry group America's Health Insurance Plans (AHIP) January 2009 data shows that over 200,000 people were covered by high deductible/HSA plans here in Wisconsin.

Perhaps since this is a sate taxation issue, it's not entirely fair to criticize Baldwin. State Representative Mark Pocan (D-Madison) though, has no excuse for his support of the continued unequal treatment of HSA contributions. This issue is not a new one (here's a Biz Blog post on the issue from 2007) yet Pocan seems untroubled by this continuing discrepancy. Here he is in the State Journal article:

Rep. Mark Pocan, D-Madison, a key supporter of the benefits, said the change would end UW-Madison's status as the only Big Ten university not to offer the benefits to its employees.

"It's great that we're finally catching up to most larger businesses and all the other Big Ten universities," Pocan said.

As of 2008, only four other states and the District of Columbia didn't allow individuals to deduct HSA contributions. Wisconsin would be better served if Pocan and Baldwin spent less time and effort trying to keep up with the other Big 10 states and more time moving away from the small group of states that continue the unequal tax treatment of contributions to health savings accounts.