For the first time since 1994, the issue of health care coverage for uninsured Americans
is back in the center of political debate. But this time -- in a striking sign of how far the
debate has moved from bureaucratic, top-down solutions -- a consensus is emerging around
a new means for achieving universal coverage: tax credits. Instead of creating new
government entitlements to medical services, tax credits provide public financing to help
uninsured Americans buy private health insurance.
Few Democrats today entertain serious hopes of creating a U.S. version of
Canada's "single payer" health system. President Clinton has proposed tax
credits to help the near-elderly and workers between jobs buy insurance. This year,
Democratic presidential aspirants Al Gore and Bill Bradley offered competing plans for
using tax credits to extend coverage. Even such erstwhile single payer advocates as
Representatives Peter Stark (D-CA) and Jim McDermott (D-WA) have thrown their support
behind a tax credit.
For their part, Republicans are moving beyond their "just say no"
approach to health policy. GOP leaders on health care, like Senator Bill Frist (R-TN) and
Representative Bill Thomas (R-CA), have embraced health insurance tax credits.
Last month, two key New Democrats, Senator John Breaux (D-LA) and
Representative Cal Dooley (D-CA), announced bipartisan, bicameral tax credit legislation
with Senator Jim Jeffords (R-VT) and Representative Richard Armey (R-TX) as the primary
sponsors.
Since 1997, the Progressive Policy Institute (PPI) has advocated a health insurance tax credit to break the left-right impasse on health care reform. The conservative Heritage Foundation has also embraced this approach, even though it entails a dramatic expansion of public spending to cover the uninsured. While the two parties remain sharply divided on other health-related issues, the intellectual and political convergence around tax creditsin an election year, no lessilluminates the common ground on which bipartisan agreements can be struck to dramatically reduce the number of Americans without health care coverage. This backgrounder explains how tax credits would help the uninsured, how they will also help people with insurance, and how much they would cost.
The federal tax code is a logical but not obvious vehicle for expanding health coverage.
Washington already subsidizes coverage for most Americans, by exempting from taxes
(both income and payroll) the insurance premiums that an employer pays on employees'
behalf. As a result, job-based insurance is typically 30 percent to 50 percent cheaper than
buying coverage individually. Yet few people are aware of this tax exclusion because they
do not have to report it as an itemized deduction when they file their taxes.
The tax exclusion, however, contains some serious flaws:
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It shortchanges workers in low tax brackets. In 1998, families with incomes under
$15,000 received a tax break for job-based coverage worth $71 on average, compared to
families with incomes of $100,000 or more who received $2,357.1
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It provides nothing to workers whose employers do not offer coverage. About 80
percent of the uninsured do have not access to job-based coverage even though most
uninsured are workers with dependents. 2
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It does not help workers who are between jobs. One of every five Americans goes
without coverage for at least one month each year, often due to short periods of
unemployment.3
A new tax credit for health insurance would fix these problems. A
credit is worth the same to all taxpayers, while the tax exclusion is more valuable to people
in higher tax brackets. Unlike the exclusion, the credit can and should be made refundable,
to help people who earn too little to pay taxes. In addition, to help people who do not have
enough cash to purchase insurance before receiving a refund check, the credit could go
directly to the insurance company they select, as Senator Bradley and others have
proposed.
In most cases, however, a tax credit would go directly to workers who could use
it to buy insurance if they were between jobs or if their employer did not offer coverage.
Health insurance would become less dependent on work status.
One of the few disadvantages of a tax credit is that it would make the tax code
marginally more complex. But it would be a far less bureaucratic way of pursuing the goal
of universal coverage than expanding government-run programs.
A tax credit would not only help the uninsured buy health coverage but would also
benefit people who already have insurance. Workers with coverage could choose between
using the new tax credit or the existing tax exclusion for employer-paid insurance. This
choice would directly benefit insured workers who find themselves in one of the following
three situations:
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Workers who want to change jobs but are afraid of losing their health care
coverage. With a tax credit, workers could purchase coverage on their own if they
wished to take a new job that did not provide it. Of course, the fact that individuals could
get coverage on their own might tempt some companies to drop their coverage altogether.
But competitive pressures would keep employers from doing so (especially in a tight labor
market) unless their employees could find better deals elsewhere. That may be true, for
example, of workers in small businesses, which lack the bulk purchasing power of larger
companies. Those workers might well be better off if they joined together with other
individuals to purchase coverage through buyers' clubs like Costco, or other organizations
like unions and chambers of commerce. Memberships in such groups could swell as the
44 million uninsured started to use them to leverage the new purchasing power tax credits
would give them.
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Workers who do not like the insurance plan choices offered by their employer.
In the era of managed care, a choice of insurance is important because the quality of
care can vary from plan to plan. Workers who want something better than what their
employer offers could use the tax credit to purchase coverage customized to their
particular needs.
Since employer-paid health care is part of workers' overall compensation, those who
"opt out" of the company plan could reasonably ask their employers to increase
their paychecks. However, companies will have to carefully monitor the health
characteristics of those who opt out as well as those who choose to stay in company-paid
health plans. For example, since younger, healthier employees can often find less
expensive policies on their own, employers would have to pay more to insure their older
workers who are more likely to need medical treatment.
Opting out might sound like an expensive proposition for the government since it
means that many more people could use the tax credit than the 44 million uninsured. The
added costs, however, would be at least partially offset by tax revenue increases as
employers converted benefits into taxable wages to compensate workers who opt
out.
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Low-income workers with coverage. Even when low-income workers find
jobs that offers insurance, it generally means they will get less in take-home pay. And
because they are in the lowest tax bracket, the value of a tax exclusion will be less to them
than the value of the new health insurance tax credit. To avoid creating a new inequity in
federal tax policy, these workers should be allowed to "trade up" to a tax
creditfor example, by claiming a tax refund that represents the difference between the
value of their existing tax exclusion and the value of the new health insurance tax credit.
This will of course make the tax credit approach more expensive. But not
allowing low-income workers to trade up will penalize them for taking jobs with coverage.
And it will give employers who mainly hire lower-wage workers (such as restaurants and
retailers) a perverse incentive to drop their coverage, thereby denying their employees the
price discounts that come from group purchasing. Tax policy should level the playing field
between job-based and individually-purchased forms of insurance rather than favoring one
or the other.
Finally, all insured workers would benefit indirectly from a tax credit.
Expanding coverage will enable the uninsured to live longer and healthier lives. In the
long run, ensuring universal access to medical insurance will be less costly to society as a
whole and it will foster stronger ties of mutual responsibility and community.
Covering the uninsured will be expensive, though no one can predict exactly what it
would cost. Given America's favorable fiscal and budget outlook, the Progressive Policy
Institute believes we should invest $25 billion a year to dramatically reduce the ranks of
the uninsured. To illustrate, an annual budget of $25 billion would allow a tax credit
averaging $1,000 for 25 million people (over half of the uninsured). That is roughly half
of the average cost of insurance and would provide a strong inducement for the uninsured
to acquire coverage. But after a trial period of several years, we should reassess the credit
to make sure that it is bringing health insurance within reach of the millions of needy
Americans who cannot now afford it.
Calculating the actual costs and the reduction in the number of uninsured
depends on many factors including the number of uninsured who use the subsidies, the
number of insured who trade up to a tax credit, and the value of the subsidy as specified
in law. In addition, the actual design of the tax credit is a complicated matter which PPI
will discuss in greater detail in a forthcoming report. However they are designed, the
flexibility of tax credits will allow for budgetary adjustments as the process moves along.
In contrast, expanding coverage through an entitlement to a specified package
of benefits, which is how Medicare works, would make the budgeting process much more
difficult. It would confer new benefits on rich and poor alike and lead to irresistible
political pressure to expand benefits and thereby undermine even the most disciplined
budgetary process. With a tax credit, individuals themselves would choose the level of
coverage that suits their circumstances and preferences. At the same time, a tax credit
would guarantee a steady stream of funding because the value of the tax credit would be
set in law and would not be subject to an annual appropriations process in Congress.
Several other policy initiatives would be necessary to ensure the fair and widespread
use of tax credits. For example, some of the $25 billion annual budget should be set aside
for states to offer supplemental subsidies to individuals for whom a federal tax credit is
unlikely to be enough because they are older or sicker and pay more for coverage. Other
ingredients include: reforms to reconcile Medicaid and the Children's Health Insurance
Program (CHIP) with tax credits; purchasing groups to enable small businesses and
individuals to gain the buying clout of large employers; information so individuals can be
smart about the coverage they choose; and a requirement that everyone buy health
insurance just as states require auto insurance.
Such additional refoms, however, should be pursued step-by-step so the
political process is not overwhelmed by controversy and excessive costs. Indeed, as a first
step, tax credits aimed mostly at the uninsured would avoid the political risks of more
controversial or partisan approaches. Crucially, new tax credits would not scare
Americans who might otherwise fear that reform could threaten their existing coverage.
Step-by-step reform will achieve the progressive goal of universal coverage much sooner
and far more efficiently than the bureaucratic, big government proposals of the past.
