Bush's risky State of the Union ploy

The president's emphasis on health care addresses a vital need, but the Democrats denounce it as an unfair tax. Fortune's Nina Easton previews the upcoming battle.

By Nina Easton, Fortune Washington bureau chief

WASHINGTON (Fortune) -- Just when you thought Washington politics couldn't get any weirder: now George W. Bush wants to tax the rich.

That's right. The Republican president the Democrats accuse of playing proxy-in-chief for America's privileged elite wants to raise taxes on executives and other beneficiaries of generous, employer-provided medical insurance plans.

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It's all part of a plan to reduce health care costs that he will detail in his State of the Union speech tonight. But of course the Democrats (who these days like to think they're thinking two political steps ahead of the White House - and probably are) have already devised their own name for Bush's health care proposal. "I'm going to call it 'a tax hike on the middle class'," Democratic Senate strategist James Manley tells Fortune. Ouch.

Prod all you want, but Bush administration officials studiously refuse to use the words "tax hike" at all, let alone a tax hike on the middle or upper-middle or even upper class. Bush officials prefer to call the plan a "revenue neutral" tax reform that "levels the playing field" between those who enjoy generous insurance policies from their employers and those who can't afford health insurance at all.

"There will be some winners and some losers," concedes Katherine Baicker, Harvard-trained economist and member of Bush's Council on Economic Advisers.

Under the plan, people who now buy their own insurance or sign up for basic coverage from their employers would get a tax break. But those 20 percent of employees with "more generous, deluxe, gold-plated plans," as Baicker puts it, will have to pay a tax if they "didn't change their behavior at all." That is, if they don't opt for a lower-cost insurance plan.

Here's how the plan would work: The insurance benefits that employees receive would show up on their W-2 statements as income. Just like wages, these health plans would be subject to federal income taxes. But employees would receive a standard deduction of $7,500 per individual and $15,000 for a family of four. Since the average cost of a plan for a family of four is about $11,500 - to rise to $13,600 when the plan goes into effect in 2009 - most people would get a tax break and those who are uninsured would get a big boost to cover out-of-pocket costs. (Employers would retain the current deduction for health care policies provided to employees.)

But of the nearly 47 million uninsured Americans, Bush officials estimate that only 3 million will be added to the insurance rolls with the change. So the plan also includes subsidies to states to help cover those who can't afford insurance.

Forcing employees - whether secretaries or middle management or senior executives - to account for the cost of their health insurance is a gutsy move on Bush's part. Deputy press secretary Tony Fratto asked a group of reporters at an afternoon briefing how many knew the cost of their insurance. Few, of course, did. Americans are notoriously ignorant of the true costs of their medical bills, which adds to insurance inflation and a troubling lack of emphasis on preventative medicine.

But the Bush plan will run into plenty of skeptics, starting with the 20 percent of policyholders who will be forced to pay higher taxes to keep their benefits.

More to the point, the plan is being viewed as dead-on-arrival in a Congress controlled by Democrats. Every politician these days gives lip service to the health care costs that are driving major companies toward bankruptcy.

As Senate Majority Leader Harry Reid notes on his Web site: "Today, Starbucks spends more on health care than on coffee. GM spends more on health care than on steel. We can't ask our companies to go head-to-head with foreign competitors with this burden on their backs."

But the language of the Democrats is loaded with calls for government-mandated universal health care. Manley gave Bush credit for putting the subject of health care costs on the table, but made it clear that the Democrats plan to pursue their own ideas on solutions.

If the president had pushed the same health care plan two or three years ago, it might have gained traction. Now, however, his political position is severely weakened by a Democratic-controlled Congress, his low standing in the polls and the public's broadening opposition to the war in Iraq.

When Bush addresses the nation tonight, he'll sound an awful lot like a man screaming from the bottom of the ocean: lots of bubbles and flaying arms, but impossible to hear above the sea roar of Iraq.  Top of page