A number of legislative proposals on Capitol Hill would provide uninsured workers with a tax credit to help them purchase health insurance. The most recent measure was introduced on March 14 by Senators John Breaux (D-Louisiana) and James Jeffords (R-Vermont); President Bush has proposed a similar plan.
Tax credit proposals do not have universal support. Some reformers argue that a better way to reduce the number of uninsured in the country would be to subsidize employers. Employment-sponsored health plans are popular and practical, they maintain; subsidizing employers, rather than individuals, thus would be a better way to cover uninsured families.
This view, however, fails to recognize the inherent limitation of employer-sponsored insurance. While it usually does make sense for large, sophisticated employers to sponsor insurance—that is, to arrange coverage for their employees—it is administratively costly and inefficient for small employers to do so. Moreover, it is difficult for small firms to offer plan choices to their employees, or to tailor coverage to employee needs. Subsidizing small employers would not overcome these drawbacks.
Variation on a Theme
What is needed is a variant of employment-based coverage for certain groups of workers, especially employees of small firms, among whom the rate of uninsurance is particularly high. Crafting such a variant requires lawmakers to recognize that:
- Providing tax credits to employers rather than families would not solve the uninsurance problem.
- Although the workplace may be the best location through which to provide families with coverage, employers are not necessarily the best sponsors of coverage.
- Individual tax credits could make large corporate health plans available to non-employees.
- Credits would make it possible for plans to be offered through churches, unions, and other associations, as well as through the Federal Employees Health Benefits Program (FEHBP).
- Automatic enrollment could be used to boost coverage.
- Tax credits could easily be made available to families when payments are due.
- Congress can protect traditional employer-sponsored coverage.
Obstacles to Employment-Based Coverage
The obstacles to employment-based coverage in the small business sector help explain the high level of uninsurance among families with workers in that sector.
According to a recent Kaiser Foundation survey,
- 74 percent of the uninsured are in families with at least one full-time worker;
- while 99 percent of large firms offer insurance, only 55 percent of firms with fewer than 10 employees do so; and
- 45 percent of low-wage workers (those who earned less than $7 an hour in 1996) are not even offered insurance by their employers.
The limitations of small firms as sponsors of insurance reveal the weakness of proposals that would subsidize employers to cover the uninsured. Tax credits or other subsidies for employers do not make small firms good risk pools. Even though a subsidy would help to offset the high administrative costs borne by small employers, it would not make administration more efficient or sophisticated.
Nor would a subsidy address the “hassle factor” that causes so many small business owners to compete for workers by giving cash instead of complex benefits.
Tax credits for employers—in contrast to tax credits for employees—are also very difficult to target efficiently.
If the government wishes to help lower-income families get insurance, it can base eligibility for an individual tax credit program on family income. Trying to do this through a credit for employers raises the problem of assuring the subsidy supports coverage only for those who really need assistance.
Simply providing a subsidy to all small businesses would not do this, since the taxpayer would end up subsidizing the coverage of many well-paid lawyers, doctors, computer engineers, and others who work for small firms. Trying to subsidize only lower-income employees would require employers to determine the household income of their employees—not only an administrative burden, but also an invitation to privacy violations and potential fraud.
Individual Tax Credits Better
Individual tax credits would allow the employment-based system to evolve in a way that would better meet the needs of working families. Such credits also would allow traditional employer-sponsored insurance to continue for most workers, and even make it available to additional families.
But a system of credits for families also would encourage the simultaneous development of a slightly different system, primarily for uninsured workers in small firms.
Proposals for individual tax credits for health coverage, such as those advanced by the President and bipartisan groups of lawmakers on Capitol Hill, would help remove the barriers to alternative insurance arrangements and make new forms of coverage—including plans offered through churches, large corporations, and the FEHBP—available to working Americans.
For this to occur, however, Congress must recognize the important distinction between the place of employment as the convenient place to obtain insurance and making tax relief to families contingent upon employer sponsorship of their health insurance.
Stuart M. Butler, Ph.D., is vice president for domestic and economic policy studies at The Heritage Foundation.
For more information . . .
The full text of Stuart Butler’s Heritage Foundation Backgrounder, on which this article is based, is available on The Heritage Foundation’s Web site at http://www.heritage.org/library/backgrounder/pdf/bg_1420.pdf (Adobe Acrobat’s PDF format) and http://www.heritage.org/library/backgrounder/bg1420.html.
