Political candidates routinely use promises to lower healthcare expenses as campaign talking points, but their actions, once elected, don’t always reflect these purported concerns. Legislators who redistribute wealth to cover medical costs but impose tax penalties on responsible individuals trying to pay their own, are seemingly more interested in fostering voter dependence on them than in actually empowering those voters to lower their own healthcare expenses.
Such is the case with restrictions some states place on Health Savings Accounts (HSAs), which allow individuals to set aside tax-free money for their healthcare costs and earn interest on it. Healthcare expenditures per person in the U.S. have multiplied by six over the past fifty years after adjusting for inflation, and an honest examination of repeated government intervention reveals it backfires and results in further price increases. Yet, legislators keep spinning their controlling programs—including HSA curtailments—as benevolent actions on behalf of voters.
Do your state legislators support your HSA use, or do they add to healthcare-related poverty so they can “solve” it if you vote for them?
Hall Of Shame: California And New Jersey
The federal government has a history of continually increasing its taxation power, so it should give you pause if your state taxes your healthcare savings account more harshly than the U.S. Congress does.
At the federal level, HSA contributions provide triple relief. Any money you put into an HSA is deductible from your taxable income (and employer contributions are deductible for them as well), contributors pay no taxes on earnings on the money in the account (including interest, dividends, and capital gains), and the distributions are not taxed. In 48 states, some similar laws exist for state taxes. But California and New Jersey tax money set aside for medical expenses at every point possible, despite already having substantial healthcare costs per capita, and despite California’s Gov. Gavin Newsom and New Jersey’s Gov. Phil Murphy claiming to prioritize affordable health care.
These two governors, along with their supporters in their state legislators, epitomize pretended generosity. They take tax dollars with the hidden hand while giving it out with the visible hand. They raise overall healthcare costs while making a show of concern about them.
Hall Of Needing Improvement: Tennessee And New Hampshire
Unlike these two hall-of-shame states, Tennessee and New Hampshire do not treat HSA contributions as taxable income. However, they do tax dividends and earnings on the contributed HSA money if total interest earnings from all types of investments reach a certain threshold. In other words, once residents make enough interest from any other investments, they must start paying taxes on their HSA interest.
Certainly, this is preferable to taxing the saved money as well. Both in principle and in total benefit to the taxpayer, taxes on only interest differ from taxes on the original invested money too. But ultimately, these taxes still disincentivize responsible decisions that benefit the entire population.
Not only does preparing for one’s own medical expenses prevent forcing taxpayers to fund them, but investing money generally helps the whole economy function. And under an already baffling federal tax code, these odd state laws add an unnecessary level of complication for everyone involved. For multiple reasons, both states need to end this rule.
Most Improved: Alabama, Maine, Pennsylvania… And Especially Wisconsin
As of 2005, two years after the federal Medicare Prescription Drug, Improvement, and Modernization Act established the tax-deductible HSA program, these four states (along with current holdouts California and New Jersey) still taxed HSA contributions. But over 15 years, they all eventually relented, with Alabama the most recent to change its policy in 2018.
The eventual victory of all four should give California and New Jersey residents hope, but none deserve more celebration than Wisconsin. When Gov. Scott Walker entered office in January 2011, his first executive order was to propose the reversal of the HSA contribution tax. Utter chaos immediately ensued.
Opponents protested, and legislators left the state to postpone the vote. In March 2011, the bill passed, but legal wrangling continued for three more years. It wasn’t until 2014 that the Wisconsin Supreme Court finally ruled in favor of Gov. Walker and his supporters.
California and New Jersey can do it too.
The Bottom Line
Individuals who forgo frivolous expenditures to ensure they can afford their own health care should be given every encouragement to do so. Individuals who forgo immediate gratification to invest should never be penalized for it. Any lawmakers who discourage HSA usage in any way are punishing sensible practices that help everyone, and their constituents need to recognize this activity for what it is.