State is among the last not to make Health Savings Accounts tax deductible

Almost 85 percent of Californians do not smoke, but on Nov. 7 most voters still voted against Proposition 86, a heavy, additional tax on cigarettes, defeating the measure, 52 percent to 48 percent.

The revenue generated by the tax, estimated at $2.1 billion, would have gone to hospitals, health care programs and anti-smoking efforts. California voters decided that hospitals should depend for revenue on their patients, not tobacco taxes.

Californians deserve a better path to health care reform. Rather than raising taxes, there is a smarter way to empower patients with control of their own health care.

Health Savings Accounts function as a kind of 401-k account for health purposes. Dec. 8 marks the three-year anniversary of HSAs, which have grown increasingly popular since President Bush signed the 2003 Medicare Modernization Act. The law exempts purchasers of HSAs from federal taxation on their accounts, and most states have also made HSAs deductible from state income taxes.

All contributions to an HSA and any earnings are nontaxable, which allows them to compound. HSAs also foster personal autonomy in a crippled health-care system that leaves Americans far too dependent on employers and restrained by government regulations to take responsibility for their own health. Perhaps the strongest argument in favor of HSAs is that they have helped people to save money.

California, Alabama, Wisconsin and New Jersey are the only states that still tax residents for having HSAs. California has the second-highest income taxes in the country, after Vermont, but Democratic legislators in Sacramento have blocked efforts by the governor and some Republican lawmakers to make HSAs deductible on California tax returns.

This situation adds an unnecessary barrier to the adoption of HSAs, especially among small employers who need straightforward solutions to rising health costs. Our employer-based health care system has made us dependent on our jobs for increasingly limited health care rather than encouraging independence and choice from a broad spectrum of options.

Interest groups like the California Nurses Association, Health Care for All and others strongly oppose HSAs. They would rather see government-controlled health care in California. California legislators have flirted several times with such high-handed policy: Proposition 72, which voters turned down in 2004, would have forced large and medium-size companies to provide their workers with health insurance. This year, Senate Bill 40, which the Legislature passed and Gov. Schwarzenegger vetoed, would have imposed a complete government monopoly.

Already, 3.2 million Americans currently own HSAs, and, despite what critics charge, HSAs do not only benefit the affluent. About half of HSA holders in the individual market are over 40 years old, and 23 percent are under 20. Surveys suggest that 31 percent to 45 percent of Americans with HSA-qualified plans earn less than $50,000 a year, and 25 percent have incomes of $35,000 or less.

Unfortunately, the government has overregulated HSAs. Americans should be free to put more money into HSAs than currently allowed, and pair the accounts with any health plan they choose. The current contribution limit is $2,700 for an individual and $5,450 for a family. Also, the government requires HSA holders to purchase a high-deductible health plan, which covers serious illness or injury. HSA funds also can be used for routine medical expenses.

HSAs are not the definitive solution to all health care problems, but a smart step forward in the effort to repair an inefficient system. Californians have clearly said that ever-increasing taxes are not the path to reform. They need increased flexibility and freedom from an employer-based structure, along with more personal choice, ownership and savings.

Californians should be rewarded, not penalized, for taking responsibility for their own health spending. Gov. Schwarzenegger, who will likely make health care the cornerstone of his state of the state address in January, should push for policies that make HSAs deductible from state income tax.