Low Ball Administration Estimates Are Reported But Doubted

In an attempt to soft-pedal the full impact of HSAs on the budget, the Bush administration is apparently reducing the tax collection impact over the next six years. Right now, healthcare related tax breaks are among the highest of all categories, with HSAs estimated at about the 15th tier.

The new Bush Administration budget documents released February 7 predict that tax expenditures for Health Savings Accounts will be strong this year and next, but then start to slow and actually decline in 2010. The total tax expenditure from 2006-2010 is estimated at only $15.86 billion, an amount nobody would define as a major new tax break.

That translates into a rise from one million HSAs at the end of 2004 to just 6.3 million in 2010. CDMR sees this number as on the very low side of current industry predictions.

These estimates are very low in comparison with other group predictions of 20 million accounts by 2010. The lowest estimates for tax deductions by outside sources are $45 billion.

The analysis was first reported by Consumer Driven Market Report newsletter.

The budget assumes that the tax expenditure (tax loss) from HSAs in 2004 was $620 million. The HSA tax break is projected to rise to $1.05 billion in 2005 (+69.4%), $1.83 billion in 2006 (+74.3%), $2.65 billion in 2007 (+44.8%), $3.51 billion in 2008 (+32.5%), $3.96 billion in 2008 (+12.8%), and end the decade with a slight decline to $3.91 billion (down 1.3%).

According to Consumer Driven Market Report, the budget does not disclose the assumptions used, but it's not difficult to guess. The 2004 tax expenditure number in the budget is $620 million.  Assuming one million individuals, that's $620 per individual. That seems reasonable: it is the same as a top line HSA deduction of $2,215 on a marginal tax rate of 28%. The projected growth in HSAs can be extrapolated based on one million times the actual percentage growth in the tax expenditure. The only guess is that this assumes the same tax brackets and average contributions as 2004, a safe bet.

Industry experts believe the low balling is being put out by the administration as it prepares to add additional tax benefits to the program. A trial balloon late last year to cap or reduce tax benefits for companies that pay HSA premiums was quickly shot down. Putting some cap on these expenditures appears possible as the new assumptions predicate that employers will not pay for premiums by 2010.