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Taxing Employee Benefits to Pay for Obama Health Care Plan Still an Option

The White House left open the possibility Sunday that President Obama could tax employer-provided health insurance to pay for his $1 trillion universal health care plan, a violation of the president's campaign pledge to not raise taxes on middle-class families.

White House adviser David Axelrod said the administration wouldn't rule out taxing some employees' benefits to fund a health care agenda that has yet to take final form. The move would be a compromise with fellow Democrats, who are pushing the proposal as a way to pay for the massive undertaking without ballooning the federal deficit. 

"There are a number of formulations and we'll wait and see. The important thing at this point is to keep the process moving, to keep people at the table, to the keep the discussions going," Axelrod said. "We've gotten a long way down the road and we want to finish that journey."

Also an option is to have employers who don't provide coverage to pay an 8 percent payroll tax. Health and Human Service Secretary Kathleen Sebelius said she believes the economy won't be affected negatively by that cost. 

"I think the issues of whether there's going to be some kind of pay-or-play feature, again, is being discussed in both the House and the Senate. The House has one version, but they also have some firewalls to protect coverage that's there in place right now," Sebelius told "FOX News Sunday." 

"There's a protection for small business owners, an exemption that they would not be subjected to the 8 percent payroll, and some encouragement, some tax incentives, to get them into the marketplace. Often they're the ones who are squeezed by the cost of just not being able to afford the coverage," she said.

If Obama compromises on taxing employee benefits, it would not only reverse his promise not to raise taxes on those earning less than $250,000, he would be borrowing directly from his campaign opponent, Sen. John McCain.

"I pledge that under my plan, no one making less than $250,000 a year will see any type of tax increase," Obama told a crowd in Dover, N.H., last year. "Not income tax, not capital gains taxes, not any kind of tax."

Obama spent millions on campaign commercials attacking McCain's idea to tax employee benefits, running one ad that accused McCain of favoring "taxing health care instead of fixing it. We can't afford John McCain."

A second Obama ad called McCain's approach "the largest middle-class tax increase in history." Driving the point home, it contended the "McCain tax could cost your family thousands. Can you afford it?"

Asked about the reversal, Sebelius said, "He vigorously opposed Senator McCain's idea to eliminate the benefits, the non-taxable benefits, because he figures that would really dismantle the employer marketplace. I think that he's open to discussion but prefers, again, capping the itemized deduction, returning it to the days of Ronald Reagan."

Sebelius said Obama's plan foresees $660 billion over 10 years acquired through savings in the the current system that comes from people gaining insurance and therefore staying healthier because they will schedule doctor visits, as well as $330 billion in that same time from capping itemized deductions on wealthy Americans. 

"He thinks that's far preferable to the ideas currently being discussed about taxing employee benefits," she said.

Under the current proposals, a tax on health benefits would affect only those with pricey health plans. The idea would be to tax as income the portion of health benefits worth more than a specified limit. Officials are considering several options, including one that would set the limit at $17,240 for family coverage and $6,800 for individuals.

Plans worth more than that would be taxed; those worth less would see no increase.

Obama has faced similar criticism before. When he increased taxes on tobacco to pay for a children's health bill, his critics said he was raising taxes on those making less than $250,000 a year.

Obama left open the possibility of a tax during interviews last week, insisting he wasn't taking any option off the table despite his personal opposition. But two of his high-profile advisers -- budget chief Peter Orszag and economic adviser Jason Furman -- both have indicated they support some taxes on health benefits to pay for the overhaul.

Sen. Chuck Grassley said that Obama should step in an oppose the tax if he's truly against it. Otherwise, he faces a loss to his own Democratic Party and his own campaign credibility.

"I think it's going to take presidential leadership to get people of his party to see that we shouldn't be subsidizing high-end health insurance policies that drive up inflation in health insurance," said Grassley, the top Republican on the Senate Finance Committee.

Grassley recalled Obama's scathing criticism of their GOP presidential nominee in suggesting the caucus may hold out on taxing employee benefits.

"Since the president denigrated John McCain's effort to move in this direction during the campaign, it's going to take, in order to win over Republicans, presidential leadership in that direction," Grassley said.

Axelrod insisted that the White House has made progress on a health care plan and is working with Congress. Even so, the emerging legislation is hardly the bipartisan collaboration Obama's top advisers had sought.

"One of the problems we've had in this town is that people draw lines in the sand and they stop talking to each other," Axelrod said. "And you don't get anything done. That's not the way the president approaches us."

Axelrod appeared on ABC's "This Week" and NBC's "Meet the Press." Grassley appeared on "This Week."

The Associated Press contributed to this report.