Health insurance for most non-elderly Americans is purchased with funds from three sources: an employer contribution, an employee contribution, and a government tax subsidy.
Presumptive Republican presidential nominee Sen. John McCain’s (R-AZ) health plan is based on the idea the first two contributions should be determined by individual choice and competition in the marketplace. The government’s contribution would be the same for everyone–$2,500 for every adult, and $5,000 for every family.
Problems with Current System
Including state and local government, tax subsidies for private health insurance exceed $200 billion a year. The distribution of these dollars is arbitrary, unfair, and wasteful:
- The current system is arbitrary. How much help a family gets from government depends on such factors as its tax bracket, the type of health plan the employer chooses, health costs in the city where the family lives, and state and local tax rates.
Example: An upper-income family living in a high-cost, high-tax city can realize an annual subsidy of $10,000 or more, while a low-income family living in a low-cost, low-tax city can receive a subsidy of $750 or less.
- Today’s system is unfair. According to the Lewin Group, families earning $100,000 a year get four times as much tax relief as those earning $25,000. We give the most encouragement to those people who least need it and who probably would purchase the insurance anyway.
Example: A $10,000 health plan purchased by an employer for a family in a 50 percent tax bracket gets $5,000 of tax relief. The same plan for a family in a 15 percent bracket gets $1,500 of tax relief.
- The current government policy is wasteful. People can always lower their taxes by spending more on health insurance, and there is no limit to how bloated a health plan can be. Theoretically, a plan could cover marriage counseling, over-the-counter purchases of aspirin, or anything else the Internal Revenue Service considers a medical expense.
Example: Some companies have generous, first-dollar coverage for executives and their families (all subsidized through the tax code), while rank-and-file workers have deductibles, co-payments, and a more limited range of benefits.
Burdens on Individuals
The current system lays special burdens on several different categories of people.
Four of every 10 employers do not offer health insurance to their employees. When these workers purchase insurance on their own, they must pay with after-tax dollars. For a worker facing a 15.3 percent (FICA) payroll tax and a 15 percent income tax rate, the after-tax cost is almost 50 percent more than for employer-provided insurance.
About one in every five workers is part-time. Many employers do not offer these workers health insurance, and federal law makes it difficult, if not impossible, for employers to give them a choice between wages and health insurance. If these workers buy insurance on their own, they must do so with after-tax dollars.
The self-employed are now able to deduct health insurance costs on their income tax returns, but unlike other workers they get no relief from the 15.3 percent payroll tax. For many, the payroll tax bite is larger than the income tax.
Because women move into and out of the labor market more frequently than men, are more likely to work part-time, and are increasingly self-employed, they are more likely to have to purchase insurance on their own.
Advantages of Tax Credit
John McCain’s proposed health care policy reforms would address all of these problems.
- The McCain plan is fair. Everyone is treated alike, regardless of income or job status.
- The McCain plan provides much more help to low- and average-income families than the current system. For the first time since World War II, under McCain’s plan low- and moderate-income families would get just as much tax relief as the very rich to purchase health insurance.
- The McCain plan is much better for middle-income families than his rival’s proposal. Illinois Sen. Barack Obama’s (D) proposed health care plan would continue the current practice of giving the vast bulk of federal help to the rich (through tax subsidies) and the poor (through spending programs). The McCain tax credit, by contrast, gives the most new tax relief to the broad middle-income group.
- The McCain plan would end discrimination against people who must buy their own insurance. Under McCain’s plan, people who have to purchase their own insurance (including part-time workers and the self-employed) would get just as much tax relief as people who obtain insurance through an employer.
- The McCain plan would encourage all Americans to control costs. The McCain tax credit would subsidize the core insurance that everyone should have. It does not subsidize all the bells and whistles, as the current system does. Since employees and their employers will be paying for additional coverage with after-tax dollars, everyone will have an incentive to compare the value of extra health benefits to the value of other things their money can buy.
Refundable, Advanceable, Portable
The McCain plan not only offers all Americans the same tax relief, it does so in a way that makes it as easy as possible for people to acquire insurance.
- The credit is refundable. People can apply $2,500 per person or $5,000 per family to the purchase of health insurance, even if they do not owe any income taxes.
- The credit is advanceable. Families will not have to wait until April 15 the following year to get their credit. They will be able to obtain the subsidy in the year in which the insurance is purchased.
- The credit is transferable. Insurance companies and other intermediaries will be able to help families obtain their credit and apply it directly to the health insurance premiums.
John C. Goodman ([email protected]) is president of the National Center for Policy Analysis. His health care blog is at http://www.john-goodman-blog.com/.
