By Michael A. Fletcher
Washington Post Staff Writer
Sunday, January 21, 2007; A04

President Bush will propose a deep tax break for Americans who purchase their own medical insurance and would finance it with an unprecedented tax on a portion of high-priced health-care plans that workers receive from their employers, according to the White House.

The initiative, which the president briefly previewed in his radio address yesterday, has a dual purpose: It would create a financial incentive for the estimated 46 million to 48 million Americans who lack health insurance to buy it. And it would rein in the soaring cost of health insurance by encouraging workers in high-priced plans to seek more modest coverage.

"Today, the tax code unfairly penalizes people who do not get health insurance through their job," Bush said. "It unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise and many Americans cannot afford the coverage they need."

The proposal, which Bush plans to fully unveil in Tuesday's State of the Union address, marks a sharp departure for a president who has been criticized for advocating tax cuts that disproportionately benefit higher-income Americans.

Administration officials familiar with the plan say it reflects the new political order in Washington, where Democrats now control both chambers of Congress. They refuse to characterize the plan as a tax increase because it raises no new money for the federal government. Instead, it would add a new tax on employer-provided health-care plans worth more than $15,000 to subsidize those who buy modestly priced plans out of their pockets.

In addition, they say, the plan is consistent with the president's idea of increasing access to health insurance through the private market while encouraging people to be more cost-conscious as they purchase medical-care coverage.

In his speech Tuesday night, the president will also propose increasing the federal assistance to states that make private health-care plans available to low-income or chronically unhealthy people who are uninsured. The administration hopes to provide waivers under Medicaid -- the government health insurance program for the poor that is jointly funded by the federal government and the states -- to allow states to redirect money from hospitals and nursing homes to individuals to help them buy health insurance.

Some states are already moving to offer health-care coverage to the uninsured. California Gov. Arnold Schwarzenegger (R) recently announced a plan to provide coverage to about 6.5 million people, including many recent immigrants, who are uninsured. If the plan is approved by the state legislature, California would become the fourth state -- along with Massachusetts, Vermont and Maine -- to offer near-universal health insurance.

Taken together, Bush's proposals are his most ambitious attempt to address the health-care crisis. In the past, Bush had pushed for limited tax breaks to help people buy health insurance, but those initiatives never gained traction. He has also advocated health savings accounts, consumer-driven plans with higher deductibles and lower premiums than those in traditional insurance.

The new tax measure would attempt to roughly equalize the benefits of people who have health insurance, whether they buy it or receive it from employers.

The estimated 150 million people covered by employer-provided health insurance are not taxed on the value of their health insurance, regardless of how much it is worth. The average employer-provided family health insurance plan costs $11,500 a year, administration officials said -- three times what it cost 19 years ago.

Under the president's proposal, workers who receive employer-provided health insurance would have to pay a tax on the cost of their benefit above $15,000, the threshold proposed by Bush for the tax break. For instance, if a person's health insurance costs $16,000, he would pay a tax on the $1,000 difference.

People with families who buy low-cost policies, meanwhile, would have their taxable income reduced by $15,000, regardless of the cost of the plans and whether they itemize deductions on their tax returns. The deduction would be $7,500 for single individuals. The deduction, to be indexed to account for inflation, would also be extended to those with employer-provided plans, to be offset by the cost of their coverage.

"This is a huge incentive for the uninsured to get coverage, but, also, the vast majority of people with employer-provided coverage will benefit as well," a senior administration official said. "This is essentially a standard deduction for health care, and the size of the deduction will be significantly higher than the cost of an average policy."

The Bush administration estimates that 80 percent of people with employer-provided plans would see their tax liability fall because the deduction would be larger than the value of their insurance plans.

The idea of ending the taxpayer subsidy for what some in the health industry call "Cadillac health insurance" policies and using the savings to subsidize insurance for those who do not have it has been around for at least two decades, experts said. Underlying the idea is the belief that the current tax structure essentially adds to the inflationary pressure on health care by subsidizing expensive health-care plans, making coverage even more unaffordable for those who do not have it.

But now may be an interesting moment to resurrect the idea because the new Democratic Congress has vowed not to initiate any new programs that cannot pay for themselves. Additionally, the idea of imposing a tax on those with generous coverage to help those without it has a progressive cast that could appeal to Democrats. "It is being proposed by a Republican, but it's kind of a Democrat idea," said Robert Laszewski, a health policy consultant. "It should be something that will interest a lot of Democrats."

Still, some leading Democrats are skeptical of the plan. "It is good that the president is finally talking about health care," said Sen. Edward M. Kennedy (D-Mass.), chairman of the Senate committee that oversees health-care matters. "I question, however, why the president thinks the way to solve this problem is through the tax code."