Self-Employed Left Twisting in the Wind on Health Insurance

Some legislation really is straightforward. It corrects an obvious inequity, fixes a technical oversight, or helps a constituency in need, like small businesses.

In fact, there is a bill pending in Congress that does all three. It would make health insurance more affordable for the smallest of small businesses -- people who work for themselves -- by eliminating the self-employment (SE) tax on health insurance premiums. But for four years running, Congress has failed to cast what should have been a simple, feel-good vote for the measure.

Instead, the situation has become an embarrassment for almost everyone involved. Republicans should be ashamed because they shoved this issue aside to pursue a partisan political agenda when they controlled Congress. And small business groups should be chagrined because they glaringly lacked the clout to get the bill passed, despite their heavy Republican leanings.

Now it's up to Democrats to set things straight. But in Congress nothing is ever simple. "We're realistic; it's a presidential election year," says Kristie Darien, executive director of the National Association for the Self-Employed (NASE). "There is always a lot of debate, but not a lot of votes or action items."

Her comments are hardly ringing with optimism, but the bill has new sponsors, and they are hoping that the fifth time will be the charm. Reps. Ron Kind, D-Wis., and Wally Herger, R-Calif., have introduced the Equity for Our Nation's Self-Employed Act.

The measure corrects an obvious inequity (health insurance is fully deductible for all other businesses); it helps a constituency in need; and it was borne out of an oversight. Lawmakers amended the tax code to make small business health insurance premiums deductible for income tax purposes, but they failed to notice that the self-employment tax was covered by a different section of the code. As a result, sole proprietors have had to continue paying while Congress fiddles.

"When you are talking about the 41 million people who lack health insurance, you can't ignore the fact that 60 percent of them are self-employed or work in small businesses," says Kind's spokesman, Anne Lupardus. "Sole proprietors have the deck stacked against them in terms of health insurance."

Indeed, a sole proprietor might typically pay $15,000 a year in health insurance premiums. With a rate of 15.3 percent (on the first $86,000 in income), the self-employment tax would add $2,295 to that bill. The tax also applies to partnerships and S corporation owners. In contrast, corporations can fully deduct health insurance costs as an "ordinary and necessary" business expense.

The health insurance deduction for the self-employed has a long history. It was first authorized by the Tax Reform Act of 1986 and phased in after that. Health insurance became 100 percent deductible for income tax purposes in 2003. But the self-employment tax covers Social Security and Medicare costs.

In 2003, then House Small Business Committee Chairman Donald Manzullo, R-Ill., and then-Ranking Member Nydia Velázquez, D-N.Y., introduced the bill for the first time. But because it was really a tax issue, the bill was referred to the House Ways and Means Committee, where it died.

"I think we had some problems when it was first introduced in just getting the momentum," says the NASE's Darien, whose organization has followed the issue from the outset. Other factors also came into play. The bill was new to the committee; it was not heavily lobbied and many members didn't understand it.

"People were confused about this," Darien acknowledges. "They had worked on 100 percent deductibility and thought that solved the problem." So at the outset, education was a big issue, she says. "It's a completely different section of the tax code. It just took time getting Hill staff up to speed."

Ironically, the bill has had bipartisan sponsorship almost every year, and the wording has never changed. In the Senate, the late Craig Thomas, R-Wyo., and Jeff Bingaman, D-N.Mex., co-sponsored the companion bill every year.

At the beginning of 2006, with the midyear elections looming, Rep. Melissa Hart, R-Pa., became a principal sponsor with Manzullo, and the bill seemed to have its best chance of passing in the Republican Congress. But Republicans had another agenda. "The Republican majority really wanted the focus to be on Health Savings Accounts (HSAs)," Darien says. "While there was a lot of support, it was not a priority."

HSAs have been a major part of President Bush's strategy to address concerns over rising health insurance costs. The administration's goal is to push consumers into cheaper private health plans, albeit with fewer benefits, and break the nation's traditional reliance on employer-sponsored plans. You can't fault congressional Republicans for pursuing the president's agenda, but did they really have to leave sole proprietors twisting in the wind? So much for the party of Main Street.

With the 2006 elections, of course, Democrats took control of the House and Senate. That means congressional priorities have shifted as well. "The Democrats want to focus on health care reform. There seems to be realistic need to do a targeted approach because wide-scale health reform is expensive," says Darien. The self-employment tax bill would cost $9.8 billion over the next 10 years, essentially a pittance.

House Ways and Means Committee Chairman Charles Rangel is currently working on a tax bill, and both bill sponsors sit on that committee, putting them in a good position to work their measure into the legislation. In the Senate, Finance Committee Chairman Max Baucus, D-Mont., and Ranking Member Charles Grassley, R-Iowa, are working on a tax package and have expressed interest in the bill, which Bingaman plans to reintroduce. Meanwhile, at last count, 46 organizations have endorsed it.

In the end, however, this measure isn't about taxes, it's about fairness and equity. The nation's 21 million sole proprietors are the most vulnerable segment of the small business community. They are entrepreneurs in the truest sense of the word. They are not looking for a special advantage with this bill, just a level playing field. Congress should go out of its way to make sure it passes.