Friday, February 11, 2011

The Dumbest Tax Break of Them All? - [In]Flexible [Health] Spending Accounts

Disclaimer: I have a Flexible Spending Account (FSA), and it provides me with a nice tax break. However, based on my own experiences with FSAs, I have concluded that they are among the dumbest tax breaks ever passed into law, and in spite of the benefit I receive from them, FSAs should be abolished.

I'm reminded of a post over at Economix, which lays out the stupidity of FSAs:
  1. They are inequitable and unfair. FSAs exist entirely at the discretion of one's employer - whether or not you can have an FSA and how much money you can tax-shelter in the FSA are completely decided by who you work for. Furthermore, as of 2006, only about 6% of the U.S. workforce participated in FSAs (though probably about 3 times that many had access to an FSA and declined to participate). Most of the workers with access to FSAs are relatively well off, so like many tax breaks (I'm looking at you too, mortgage interest tax deduction), it shovels money to the middle and upper classes, giving the poor no opportunity to participate.
  2. They are administratively burdensome, creating lots of deadweight loss (it certainly decreased my consumer surplus, anyway). I can attest to this personally - the amount of paperwork involved in setting up an FSA and making a claim through an FSA is ridiculous, and like much of private U.S. health care administration, it seems primarily set up to provide jobs for claims processors rather than to maximize patients' health care outcomes.
  3. They are inflationary. If you put money in an FSA, you have to spend it within the year that it's allocated, or you lose it. The Economix post author describes receiving (or "consuming") a colonoscopy on Christmas Eve that he otherwise would not have gotten, just to spend the unused money in his FSA before he lost it. As Economix notes, the use-it-or-lose-it provision "annually unleashes the year-end scramble by Americans to spend down the balances in their accounts, most commonly on eyeglasses and marginal medical supplies, or on sundry elective medical procedures." Also, they let Americans consume health care tax-free, which leads Americans to consume too much health care.
  4. They piss everyone off. Between the administrative burden, the pressure to spend all the money in your account, and the general lunacy surrounding FSAs, they're super annoying to participate in - but if you have an FSA available to you (like I do), I feel a pressure to use it anyway, since otherwise I'm throwing money away (as long as I can calculate my yearly health care spending with relative accuracy a year in advance).
The health care reform did not eliminate FSAs, as advocated by the Economix author, but it did place further restrictions on FSAs and placed a cap on the amount of funds people could contribute to FSAs, and it used the savings from these restrictions to pay for health care coverage for the poor - so, not a good solution, but it's a start, at least. Of course, the Republicans want to undo these restrictions as part of their plan to defund the health care reform law.

As one MIT economist put it:
Is it really so bad to pay for insurance for our lowest-income citizens by removing a tax break for our middle- and upper-income citizens that they use to buy aspirin and glasses?
Let's hope the Republicans fail, and perhaps in the next round of health care reform, we'll be able to get rid of FSAs once and for all.

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