Lost amid the “Goldie Locks” talk about President George W. Bush’s tax cut proposal—”is it too big, too small, or just right”—is another tax proposal built on a bipartisan foundation.
While partisan divisions grow over the President’s proposed across-the-board rate reductions, this other tax reform concept, aimed squarely at health care, is generating bipartisan support.
It has the approval of key Republicans, including House Majority Leader Dick Armey (R-Texas) and Nancy Johnson (R-Connecticut), chairwoman of the House Ways and Means Committee’s subcommittee on health. Leading House liberals, including Reps. Jim McDermott (D-Washington) and Pete Stark (D-California), are also on board.
There is a growing consensus, among Congressional leaders as well as policy analysts across the country, that the federal government should offer some sort of tax credit for the purchase of health insurance. That simple idea could go a long way towards reducing the number of uninsured from its current high of over 44 million.
Health Reform Is Tax Reform
Every year, the federal government “spends” about $125 billion in tax subsidies to encourage people to buy private health insurance. Yet the number of people without insurance continues to grow, because these subsidies are targeted in an arbitrary and unfair way.
Under the current system, employer payments for health insurance are excluded from an employee’s taxable income. Unlike wages, the employer-provided health benefit is not subject to payroll taxes or federal, state, and local income taxes. By means of this generous subsidy, government is effectively paying half the cost of health insurance for many families.
By contrast, individuals who don’t get insurance through an employer must earn the income, pay taxes on it, and then purchase insurance with what’s left over. In order to buy the same insurance, many middle-income families must earn twice as much money as their friends with employer-provided health benefits.
Adding to the problem, the government heavily subsidizes a safety net system of “free care.” While well-intentioned, this safety net has the perverse effect of convincing many uninsured individuals to stay that way.
More than 40 federal programs fund health services for the uninsured. The largest single program—spending more than $1.5 billion a year—is the “disproportionate share” hospital payment program, designed to compensate hospitals that serve an above-average number of indigent patients. There are also health care grants for residents of public housing, seasonal farm workers, legal immigrants, and even undocumented immigrants.
In Texas, for example, the comptroller’s office estimates the state is spending about $1,000 per year on each of its uninsured residents, or $4,000 for a family of four. This is a conservative estimate. By contrast, most of the state’s uninsured receive little or no assistance if they choose to buy private insurance instead of relying on the free care safety net.
Tax Credits Would Encourage Coverage
Federal tax credits for the private purchase of health insurance would encourage at least some of the nation’s currently uninsured to purchase coverage. Tax credits would also eliminate the “fairness gap” that currently exists between the tax treatment of coverage purchased individually versus employer-provided coverage.
Ideally, the tax credit would be uniform across the country and across income levels. The federal government’s interest in encouraging the purchase of private insurance does not change depending on where one lives or how much he or she earns.
An uninsured family with income at four times the poverty level can incur unpaid medical bills almost as easily as a family at two times the poverty level. The social interest in encouraging coverage is largely independent of income.
The tax credit also should be refundable, providing a subsidy even to those who owe no taxes. The government’s interest in encouraging the purchase of private health insurance does not vanish just because people earn low incomes.
Adopting a tax credit program does not require that we completely do away with the government’s safety net. It is a fact of life that some people, regardless of what type of encouragement the government offers them, will nevertheless remain uninsured. It is also highly likely these people will get sick at some point in their lives.
To help finance the safety net, an uninsured person’s unclaimed federal tax credit should be refundable to the state and community in which that person lives.
Many details of an effective and efficient tax credit plan remain to be worked out. But with the general approval of the administration and bipartisan support in Congress, the tax credit movement offers great potential for moving us in the direction of universal health insurance coverage.
Pete du Pont is policy chairman of the National Center for Policy Analysis and former governor of Delaware. du Pont writes a regular opinion column, “Outside the Box,” for the online Wall Street Journal.
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The National Center for Policy Analysis is headquartered in Dallas, Texas and has an office in Washington, D.C. For more information about its work, contact Richard Walker at [email protected] or visit the group’s Web site at http://www.ncpa.org.