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Biden misleads with accusation of tax increase

(Agencies)
Updated: 2008-09-27 09:07

WASHINGTON -- Joe Biden charged Thursday during a campaign stop in Pennsylvania that John McCain's tax proposals for health insurance would be "the largest tax increase in the history of America for the middle class." He was wrong.

Democratic vice presidential candidate Sen. Joe Biden, D-Del., speaks at a fire station Friday, Sept. 26, 2008, in Cudahy, Wis. [Agencies]

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McCain does propose taxing the health benefits that some 156 million people get through the workplace. That's a major change, because now no income taxes are levied on those benefits, but it's not the whole story.

So, as Biden explained, someone who makes $40,000 and gets $12,000 in health insurance benefits would end up paying income taxes on $52,000. But what Biden didn't say was that McCain also proposes to give the insured a new tax break in exchange, a $2,500 tax credit for individuals and a $5,000 tax credit for families.

For most families, that tax credit would for several years be more generous than the current tax break for employer-sponsored health insurance. An analysis of McCain's plan by the Tax Policy Center estimated that McCain's plan would increase the federal deficit by $1.3 trillion over 10 years, mainly because it would lead to less tax revenue coming in. The same group says Obama's plan would increase the deficit by $1.6 trillion over the same period.

"McCain's plan seems to be a significant tax cut, at least in the short term," said Len Burman, who oversaw the analysis for the center, a joint venture of two liberal-leaning think tanks, the Brookings Institution and the Urban Institute.

To take Biden's comparison one step further, consider his $40,000 family whose insurance cost $12,000. That family is in the 15 percent tax bracket. So, multiplying that additional $12,000 in income by 15 percent means that the family in Biden's example currently gets an $1,800 federal income-tax break. McCain's tax break for that family would be $5,000.

Burman's analysis stresses that McCain's tax credit becomes less valuable for most people as the years go by. That's because Burman assumes the tax credit would increase in value over the years at the rate of the consumer price index, which has historically risen much more slowly than health care costs. Meanwhile, the current tax break increases at the same rate as health insurance premiums grow.

By 2018, high-income households would be worse off under McCain's plan than they would have been under current law because the credit would be worth less than the current tax exclusion. But low- and middle-income workers would still see a rise in after-tax income, the center projected.

McCain's proposal would eventually turn into a tax increase for more than just the wealthy if premiums continue to outpace overall inflation, but when that would happen is unclear, and would certainly be many years down the road. The center did not estimate beyond 2018.