Updated October 19, 2008

Factcheck.org is wrong when they say Obama “mischaracterized” an aspect of McCain’s health care plan.

In last night’s debate, Obama said that under McCain’s proposal, “Your employer now has to pay taxes on the health care that you’re getting from your employer.”Factcheck says Obama got it wrong, and Factcheck says that employers would not “be taxed on the value of health benefits provided to workers.

“Factcheck is forgetting about FICA, a 15%+ payroll tax split between employers and their employees. The employer tax rate on wages and taxable benefits is around 7%. Absent a new loophole for employers in McCain’s plan, if health benefits become taxable, well, they become taxable, and they will be taxed.

Under McCain’s plan, employers that provide health care benefits will have these three choices, none of which is likely to help fix the health care problem:

  1. Increase their health care budget by 7% to pay the new McCain tax (which is separate from any inflationary rise in health care costs)
  2. Reduce health care benefits to employees by 7% in order to stay even
  3. Stop providing health care benefits to employees, since those costs will rise even more rapidly than earlier predicted

Personally, I think payroll taxes are a good thing, but they should apply to benefits only when those benefits are surrogate wages (company cars, houses, stock, golf memberships, and so on). Until we have government health care, employer-provided health care benefits should remain untaxed, for both the employer and the employee.

If Obama got something wrong here, it wasn’t a fact. Obama missed the opportunity to point out that under the McCain proposal, both workers and employers will be taxed on the value of employer-provided health care benefits.

[Added on October 19, 2008] After the debate, a McCain spokesman said McCain never intended to impose payroll tax on health benefits. A recent Wall Street Journal article by Laura Meckler shows that McCain’s camp hasn’t been clear about this.

Factcheck.org, among other publications, claims McCain’s plan will not impose payroll tax on employers for what they spend on employee health benefits. Perhaps they’re right, but they don’t give any convincing evidence. They note that the McCain-Palin web site “now says this,” but I disagree. Here’s the paragraph I assume Factcheck.org is referring to, with my annotations:

Employers will have the same incentive to provide health insurance as they do today since they will continue to deduct the cost of health insurance they provide to employees. Nothing will change. [These costs are, and will continue to be, deductible expenses from the employer’s income, and thus not subject to corporation tax. Corporation tax is a different tax than payroll tax, and there’s been no debate or question about the corporation tax liability.]  In addition [The phrase “in addition” means something new is coming into discussion. In this case, it’s the issue of payroll taxes. The words “in addition” tell us that the previous sentence was not about payroll taxes.], payroll taxes will be protected from taxes under the McCain plan. [Huh? The promise that “payroll taxes will be protected from taxes” sounds nice, but I don’t know what it means. This is either a typo or an intent to mislead.]

This McCain paragraph doesn’t say anywhere that health care benefits will remain exempt from the employer’s payroll tax. It suggests only that they will remain exempt from a different tax, the employer’s corporation tax. The words “payroll taxes” appear in the paragraph only in a context having nothing to do with health care benefits (“taxes will be protected from taxes “).

Given how easy it would be for McCain to have made a clear statement about this, I think McCain plans, or is at least leaving open the possibility, to impose employer payroll taxes (not corporation tax, not individual income tax, and not employee payroll tax) on health care benefits paid to employees.