The healthcare reform debate has entered a new stage now, after the Finance committee’s supposed bipartisan plan has been released. The plan seeks to raise revenue by taxing so-called “Cadillac” plans, or those that exceed $8,000 for individuals and $21,000 for families. The other reform proposals suggest funding about a third of healthcare reform by increasing taxes on high-income earners. Both approaches are flawed. The tax excludability of employer sponsored insurance (ESI) should be capped. This would both raise revenue and reduce premiums.

Under the current tax code, employer provided health benefits are tax exempt. This is the largest tax subsidy in the current code and it cost the U.S. government $246 billion in uncollected revenues in 2007. About 63 percent of those under age 65 receive health insurance coverage through their employer. The subsidy is structured so that those with high-income benefit disproportionately. In addition, the exemption encourages more spending on health insurance than there would otherwise be. Many ESI plans cover procedures that enrollees will never use, such as podiatry care, precisely because there is no tax paid on these plans and enrollees do not face the full cost of the plan. Capping the extent to which ESI is exempt can not only raise revenue, but can lower premiums by reducing the extent to which employer provided plans cover unnecessary procedures. Furthermore, a cap will ultimately result in increased wages, as companies substitute health benefits for lower wages. If the tax exclusion is capped, companies will compete for workers on the basis of wages rather than health benefits.

Capping the excludability of ESI has been endorsed by nearly all known health economists and by Congressional Budget Office Director Doug Elmendorf, who ironically was appointed by Speaker Nancy Pelosi. So why not use this measure a means to both raise revenue and bend the cost curve? The answer, it turns out, is quite simple. Unions back many politicians crafting healthcare reform, namely President Obama, and union members are the beneficiaries of the tax subsidy.

Special interest groups have their hands all over healthcare reform, and in and of itself there is nothing wrong with this. As policymakers struggle to find financing for a reshaping of the economy, though, it is a shame that such an obvious policy prescription is not receiving any serious consideration.