Senator Rick Santorum (R-Pennsylvania) has reintroduced a bill to create a tax credit for people who buy their own health insurance. The original measure was introduced by now-retired Congressman Dick Armey (R-Texas), and a variation on the measure was endorsed by George W. Bush during his campaign for the Presidency. Fair disclosure: I was personally involved in their efforts
Santorum’s Fair Care for the Uninsured Act of 2003 (S. 1570) was introduced on August 1. Lindsey Graham (R-South Carolina) and Wayne Allard (R-Colorado) have signed on as cosponsors. Among the bill’s key features:
- Fixed Sum. The credit is dollar for dollar up to $1,000 (for adults) and $3,000 (for families). As a result, the credit would subsidize only core insurance, leaving people free to pay for additional coverage with their own after-tax dollars. Individual insurance buyers would not be able to lower their taxes simply by buying more expensive insurance–a problem that plagues employer-provided insurance.
- Refundable. The credit is fully available to everyone who purchases insurance, regardless of whether they pay income taxes.
- Advanceable. The Bentson tax credit (circa 1989) was rarely used because low-income families had to come up with the money to pay premiums during the year and file for their tax refund the following April 15. The Santorum measure allows people to get the relief at the time they pay the premiums.
- Assignable. To increase the ease of administration, the Santorum bill allows a low-income family to assign its tax credit to an insurer so the insurer can handle all the paperwork.
- No Income Restrictions. The Santorum tax credit is available regardless of income. By contrast, the current Bush proposal, as well as other proposals, phase out as family income rises–thus raising effective marginal tax rates.
- No Supply-Side Restrictions. There are no restrictions on the type of insurance that can be purchased, such as guaranteed issue requirements that would discourage sales and threaten to undermine the individual market.
Further Improvements Possible
TALKING POINT |
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One way to achieve tax fairness and at the same time remove the distorting effect of tax subsidies is to give every taxpayer a tax break that (a) is conditional upon the purchase of insurance but (b) does not increase if the taxpayer chooses more expensive coverage. Employers and their employees would make premium payments and MSA deposits with after-tax dollars, and employees would receive a tax credit for the purchase of insurance on their personal income tax returns. |
The Santorum measure comes with a budget pricetag. A properly designed tax credit, however, would be budget-neutral, because spending on programs for the uninsured should fall as more people use the tax credit to get insurance coverage. When people claim the credit, the federal government should reduce its payments to the safety nets in those same communities. These reductions should “pay for” the cost of the credit. By contrast, people who reject the tax credit will pay higher taxes, and those taxes should help fund the safety net in communities where they live.
An earlier version of the bill unwisely mandated maintenance of effort on the part of employers–that is, the measure prohibited employers who already provide insurance coverage from dropping it. A better approach is to give people as individuals (or employers deciding for whole groups) the opportunity to choose their own tax regime. That means individuals in employer plans could choose a tax exclusion (the current system) or a tax credit, but not both.
John C. Goodman, Ph.D. founded the National Center for Policy Analysis in 1983 and has served as president since the center’s inception. His email address is [email protected].
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