• This is a rush transcript from "Your World With Neil Cavuto," July 27, 2009. This copy may not be in its final form and may be updated.

    NEIL CAVUTO, HOST: All right, in the meantime, taxing health benefits back on this front burner today, this after White House senior adviser David Axelrod called it intriguing.

    Former Democratic Congressman Martin Frost says it does make a lot of sense.

    Congressman, good to have you back with us.


    Video: Watch Neil's interview

    CAVUTO: There's no doubt, as you have pointed out in the past, that you raise a lot of money doing that. I think you could pick up the whole trillion-dollar tab and then some simply taxing everyone's health benefits.

    But Democrats are not really looking at that, right? They're looking at taxing certain benefits, or what is the deal?

    FROST: Well, here is the problem.

    Everybody recognizes that this has to be paid for. It can't contribute to the deficit. And that is the dilemma that Democrats have. The surtax was floated. The problem with the surtax is that that would take — could take the maximum rate up to 45 percent. After you — the — you have the increase...

    CAVUTO: Right.

    FROST: ... it goes back to the old rate of 39.6 percent, and then you take a — add on top of that. It goes up to 45 percent. And a lot of Democrats have problems with that.

    The other — the alternative is some sort of tax on fringe benefits. Now, organized labor is opposed to this. The original proposal was determine this on the richness of the plan. In other words, if it is a very good plan, then people get taxed on that.

    CAVUTO: Right.

    FROST: An alternative to that would be simply to make it means- tested, say people who earn more than a certain amount would have — would pay a tax on their fringe benefits. People below that would not.

    That's exactly what we do with Part B Medicare. That was means-tested a few years ago.

    CAVUTO: Well, where is the appetite for that at this point, Martin?


    CAVUTO: Do you see that people in your party are open...


    CAVUTO: ... to that, or is it they're so concerned..


    CAVUTO: ... that they look like they're taxes, you know?


    FROST: I think something has to be done, some compromise has to achieve to pay for this.

    Democrats want and the public wants something done. Now, look, a lot of people don't have insurance because they have preexisting conditions. Those people are simply — simply written out of the insurance market. Those people would like to have affordable coverage. We need to do something to make sure they can get insurance.

    There are — as we know, there are over 40 million people who don't have insurance. The hang-up is how to pay for this. And I hope Democrats will keep looking at all options, until they can come up with a plan that is paid for, so that it doesn't add a penny to the deficit. If they can't do that, it's going to be very hard to pass.

    CAVUTO: Well, a lot of the cost options — or to pay for the cost options, as you know, Martin, have been to sort of go after rich folks. I believe Nancy Pelosi said the $1 million-and-over crowd.

    Do you think — a pretty good number-cruncher in your own right — that — that you can get there from here taxing just — even if it's a 5 percent surtax, taxing just really rich people?

    FROST: I think it will be very hard, because the Senate doesn't seem to be interested in that.


    CAVUTO: So, it's a moot point?


    CAVUTO: So, that is a moot point?


    FROST: Neil, the hang-up is, it takes the maximum rate for some people to 45 percent.

    CAVUTO: Right.

    FROST: We have not had a 45 percent rate for quite a while now. And I think that is going to be very difficult to pass.

    Now, Democrats will keep working the numbers. Maybe they will be able to get that through the House. By the time — if they do get that through the House, then the Senate undoubtedly will change it. Something has to be done.