BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 353 - Dutton
As Amended May 4, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Conforms with federal law allowing deduction for
contributions to health savings accounts
EXISTING LAW
Does not include the amount of an employer's
contribution to an accident or health plan for the benefit
of the employee or the employee's spouse in the employee's
gross income.
Allows ordinary and necessary business expenses to be
deducted, including health care coverage premiums paid by
an employer for accident or health plans for employees.
Allows self-employed persons to deduct from gross
income 100% of amounts paid for health insurance for
themselves, spouses, and dependents.
Provides various tax credits, designed to provide tax
relief to taxpayers that incur certain expenses (e.g.,
child adoption) or to influence behavior, including
business practices and decisions (e.g., research credits or
economic development area hiring credits). Current state
laws do not provide tax credits for any health care costs.
Federal Law
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Defines "a high deductible health plan" (HDHP) for
2004 a health plan with an annual deductible of at least
$1,000 for individual coverage ($2,000 for family coverage)
and maximum out-of-pocket expenses of $5,000 for individual
coverage ($10,200 for family coverage.)
Provides for health savings accounts (HSA) which are
trusts created in the United States that are used
exclusively for the purpose of paying the qualified medical
expenses of the account beneficiary. HSA's are available
to individuals who are covered under a HDHP and are not
covered under any other health plan, which is not a high
deductible plan.
California has not conformed to the federal HSA
provisions.
Allows a refundable credit for the cost of health
insurance equal to 65% of the expenditure. Individuals who
are eligible for the credit are limited to the recipients
of the following: Trade Adjustment Assistance (TAA),
alternative TAA, or Pension Benefit Guaranty Corporation
(PBGC) assistance. The cost to purchase health insurance
for certain family members of the taxpayer may also qualify
for the credit. Federal law provides minimum requirements
for a health insurance plan, namely maximum deductible
amounts.
THIS BILL
Beginning with taxable year 2005, this bill fully conforms
to federal H.S.A provisions.
FISCAL EFFECT:
FTB estimates the following revenue loss associated with
this bill:
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| |
| |
|--------------------------------------------|
|Effective for Taxable Years Beginning On or |
| After January 1, 2009 |
| |
|--------------------------------------------|
| $ In Millions |
| |
--------------------------------------------
--------------------------------------------
| 2009-2010 | 2010-2011 | 2011-2012 |
| | | |
|--------------+--------------+--------------|
| -$55 | -$55 |-$60 |
| | | |
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COMMENTS:
A. Purpose of the Bill
Every dollar paid by an employer for employee health
insurance is exempt from federal and state income and
payroll taxes (i.e., employees with employer provided
health coverage receive their health coverage tax free).
However, the government taxes every dollar put into savings
accounts for employees to pay for their medical expenses
directly. The result is that tax law encourages
third-party insurance and penalizes individual insurance or
savings, thus encouraging people to rely upon third-party
bureaucracies to manage their health care, even though most
people would agree that individuals are better suited to
make their own health care decisions and manage their
discretionary expenses.
Estimates suggest that over 20% of Californians have
no health insurance. HSAs would provide the uninsured with
an affordable option for purchasing health care. A recent
report found that almost 30% of people who use HSAs were
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previously uninsured.
B. Health Care Costs
Proponents of HSAs maintain that they can reduce
overall spending on health care by giving consumers more
control over their health care costs. President Bush's
Council of Economic Advisors says "health insurance in the
United States has now also become a vehicle for financing
relatively low-cost, routine expenditures" and "has
important consequences: (1) It encourages consumers to
overuse certain types of health care. (2) It gives little
incentive for consumers to search for the lowest-price
providers. (3) It distorts incentives for technological
change."
The author states that "HSAs provide more control
over healthcare costs. Participants decide how to spend
the money in their account based on their own healthcare
needs and they keep what they do not spend." This concept
of providing consumers with more control over healthcare
costs is central to the argument of how HSAs may reduce
healthcare costs over time. The President's Council of
Economic Advisors states, "As more consumers shift into
high-deductible plans, there is greater potential for
slowing price growth and increases in cost-reducing
technology, which could benefit even consumers in
traditional insurance plans." Furthermore, proponents
state that a high deductible forces consumers to be more
aware of the cost of routine medical procedures and that
this increased price awareness and sensitivity will in turn
control health care costs.
Opponents of this measure state that this bill does
not reduce costs at all; instead, it merely shifts the cost
from a traditional employer provided healthcare system to
the employee. Furthermore, these types of plans provide
less healthcare in the form of prevention and annual check
ups and more insurance for catastrophes.
C. Rich Tax Incentive
HSAs are the only savings account with both
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tax-deductible deposits and tax-free withdrawals, provided
those withdrawals are for qualified medical expenses.
Additionally, HSAs have no income limits. Comparatively, a
traditional IRA generally allows contributions to be tax
deductible, but treats withdrawals as income subject to
tax. Contributions to a Roth IRA are taxable but qualified
withdrawals are tax-free and Roth IRAs have income limits
restricting eligibility.
D. Usage: High Income Individuals
In August 2006, the United States Government
Accountability Office issued a report titled,
"Consumer-Directed Health Plans: Early Enrollee Experiences
with Health Savings Accounts and Eligible Health Plans."
The report stated that the median income of tax filers
reporting an HSA contribution in 2004 was $133,000.
Additionally, 51 percent of those tax filers contributing
to an HSA had an income of $75,000 or more. According to
the report, "HSA-eligible plan enrollees had higher incomes
than comparison groups."
The report also stated that, "In addition to using
HSAs to pay for medical and other expenses, account holders
appear to use their HSAs as a savings vehicle. About 55
percent of those reporting HSA contributions to the IRS in
2004 did not withdrawal any funds from their account in
2004. We could not determine whether HSA-eligible plan
enrollees accumulated balances because they did not need to
use their account (that is, they paid for care from
out-of-pocket sources or did not need health care during
the year) or because they reduced their health care
spending as a result of financial incentives associated
with the HSA-eligible plan. However, many focus group
participants reported using their HSAs as a tax-advantaged
savings vehicle, accumulating their HSA funds for future
use."
Opponents to this measure cite this report as further
evidence of the fact that HSAs are generally used by
wealthier individuals and are not accessible to lower
income people.
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F. HSAs could move the employers away from low
deductible plans
Opponents of HSA accounts are concerned that it could
result in employers no longer offering low deductible
health plans, opting for high deductible plans instead, and
shifting the costs to employees. The opponents further
state that "high deductible health plans and savings
accounts hurt poor people who simply cannot afford to buy
high deductibles and are barely making ends meet."
Opponents further state that HSAs are an example of adverse
selection where one healthy group of people is more likely
to use the high deductible programs than a less healthy
group of people that cannot afford the deductibles.
G. Conformity
This bill conforms California law to federal HSA
provisions beginning with tax year 2006, however HSAs were
established beginning with tax year 2004. California is
only one of five states that do not conform to these
accounts. California does not automatically conform to
federal law but instead considers each provision
individually in order to analyze each individual policy.
Support and Opposition
Support: Health Net
Anthem Blue Cross
California Association of Health Plans
California Association of Health
Underwriters
America's Health Insurance Plans (AHIP)
California Taxpayers' Association
Association of California Life & Health
Insurance Companies
California Medical Association
California Chiropractic Association
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Oppose:Health Access California
California School Employees Association,
AFL-CIO
California Alliance for Retired Americans
American Federation of Teachers, AFL-CIO
American Federation of State,
County and Municipal Employees
California Tax Reform
Association
California Teachers
Association
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Consultant: Gayle Miller