Rep. Eric Cantor (R-Va.) is scrapping his version of a bill to expand health savings accounts (HSAs) because its tax penalties have caused angst among conservatives and business groups.

Lobbyists and aides say Cantor plans to introduce a revised bill that does not contain tax penalties on HSA enrollees and their survivors.

“It contains dangerous and unprecedented tax increases that could kill HSAs just as they are beginning to take root,” Grover Norquist, president of conservative activist group Americans for Tax Reform (ATR), wrote in a letter to Cantor last month.

“Anything that increases taxes on HSAs or makes them more complicated will discourage people from signing up,” Norquist told The Hill. He said that the Treasury Department pressed Cantor to insert the tax penalties and that stripping them would cut government revenues by $100 billion over 10 years.

“It’s never been his intention to increase taxes,” Cantor spokesman Geoff Embler said. “This bill is about giving individuals more control over their healthcare dollars. He is looking at making some revisions and introducing a bicameral bill.”

Cantor visited an ATR strategy meeting this month to assuage conservatives and business leaders, who have historically been strongly supportive of HSAs after they were approved by Congress in the Medicare Modernization Act of 2003.

“Market employers and employees have been educated that HSAs are very similar to an IRA or a 401(k),” said John Watkins, vice president of U.S. Bank, part of the HSA Council, a 15-member group that collectively administers 90 percent of the nation’s estimated three million health savings accounts. “The tax provisions were going to dramatically change how similar they were going to be. There would be a slowdown between how employers and employees could understand them, stalling out HSA adoption rates.”

Cantor’s bill, H.R. 5262, has 47 co-sponsors, including several senior members of the House Ways and Means Committee. Some co-sponsors signed on without knowing about the tax penalties, according to sources, who say the bill as is would not have enough core support to be sure of passing.

“Our message has been to put together a package that will move as quickly as possible,” said Kevin McKechnie, director of government relations at the American Bankers Insurance Association (ABIA) and staff director of the HSA Council. “It should be freed of all the penalties.”

Cantor is expected to submit his new bill near the Independence Day recess, well after this week’s designated House “Health Week.” The third-term congressman was scheduled to discuss his bill today at a Cato Institute forum with Dan Perrin, executive director of the HSA Coalition and publisher of HSA Insider, but the event was canceled.

“We want legislation to move, and if this is going to help legislation move forward, we are going to be supportive of all changes,” said Katie Strong, a spokeswoman for the U.S. Chamber of Commerce.

Democrats say HSAs harm the sick and elderly by luring low-risk populations out of traditional insurance risk pools. The Democrats point to a January report by the Government Accountability Office examining enrollment trends of federal employees in high-deductible plans like HSAs, which found enrollees in these plans tended to by younger, healthier, wealthier and male.

“In many cases, enrollment is not voluntary,” a Democratic staffer on the House Ways and Means Committee said of some HSAs. “What a lot of this does is move people to high-deductible health plans regardless of whether they can pay for the deductible. … The Cantor bill is enormously far-reaching and enormously expensive. It’s much more a tax shelter than meaningful health insurance.”

In the Senate, Sen. Tom Coburn (R-Okla.) last week introduced an HSA bill, S. 3488, similar to Cantor’s bill but without the tax penalties. Conservatives and business leaders have indicated their support. Coburn’s bill has four conservative co-sponsors and is in the Senate Finance Committee.

“There’s a high level of support and interest among House and Senate leaders and the [Bush] administration, so that automatically creates opportunities for movement,” Coburn spokesman John Hart said.