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©2007 C. Eugene Steuerle. Reprinted with permission.
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Abstract
The nation spends more than $250 billion annually on tax incentives for workers to buy health insurance, and the cost is rising fast. Nonetheless, 47 million people lack coverage. By any standard, we aren't getting our money's worth. This article discusses President Bush's proposed health plan, which would give everyone the same income tax deduction as long as they purchased health insurance, and the potential problems with this policy. It suggests that a properly designed voucher is a better vehicle for correcting the existing problems with health insurance.
Prescribing Better Under Bush's Health Plan
The nation spends more than $250 billion annually on
tax incentives for workers to buy health insurance, and
the cost is rising fast. Nonetheless, 47 million people lack
coverage. By any standard, we aren't getting our money's
worth.
Current tax subsidies favor higher-income over lowerincome
employees—and many poor people get no help
at all. Those tax breaks also encourage us to buy excessive
amounts of health insurance, because the more we
spend, the bigger the subsidy. That tends to increase
health costs, partly because the oversized health plans
include less in the way of cost constraint, and partly
because we are simply less cost conscious when someone
else is paying part of the bill. The higher costs, in turn,
tend to push some employees and smaller employers out
of the insurance market altogether. In effect, while a basic
amount of subsidy helps people buy insurance, the
additional amounts spent each year probably increase—that's right, increase, not decrease—the number of
uninsured.
The president proposed to tackle this issue by providing
what is closer to an equal subsidy for everyone.
Further, there would be no additional subsidy if we
bought more expensive health insurance. He does that by
suggesting a fairly significant tax break in return for
buying a minimal policy. Republicans and Democrats
alike should commend that effort to improve both the
fairness and the efficiency of the medical marketplace.
Once we agree with the president that we want a more
equally distributed subsidy and one more likely to expand
insurance coverage, then we need to figure out how
to amend his proposal to best achieve those goals. Yes, his
proposal would give everyone the same income tax
deduction as long as they purchased health insurance—that's fairer than current law. Social Security tax breaks
would certainly be more evenly distributed. But because
deductions are worth more to taxpayers depending on
how high their tax brackets are, higher-income people
could still get income and Social Security tax subsidies
worth more than $5,000, while many moderate-income
workers could at best get about $2,300 in Social Security
tax reduction. Some would do even worse. Thus, while
the president's proposals would reduce the disparity in
tax subsidies between rich and poor, it would not remove
them. Why not simply follow the logic of the reform and
grant vouchers or tax credits of equal size for every adult
and, similarly, for every child?
The efficiency of the subsidy must also be improved.
As structured, the proposal would turn existing health
subsidies upside down by granting an additional tax
benefit only to those people who put money into something
called health savings accounts (HSAs). Effectively,
taxpayers would be subsidized more if they did not join
with others in an insurance pool to cover health costs
over and above catastrophic amounts. Thus, a person
enrolled in an HMO could get a tax deduction of only
$15,000, but one enrolled in an HSA could get $15,000
plus, say, $3,000 put into the account—a double deduction.
That would discriminate against some forms of
insurance and favor those who could most easily come
up with the cash or afford the risk associated with high
deductibles.
Much stronger incentives are also needed to deter
people from signing up for insurance that is cheaper
because it excludes sick people and those with chronic
conditions. The administration is willing to provide
states some money to deal with those issues, but it wants
to redistribute money that is already earmarked for
health spending. It is unclear how much protection that a
potentially modest pot of money could buy.
A properly designed voucher is a much better vehicle
for addressing many of those problems. It can be extended
to people who pay little or no tax; it can be
integrated with state Medicaid and related children's
insurance for the poor; and, if it were worth the same
amount per person, it would be much easier to administer
by employers and insurance companies alike. The
president has properly identified the illness—let's now
help him put better ingredients into the prescription for a
cure.
Gene Steuerle is a senior fellow at the Urban
Institute and an economic consultant to Tax Analysts.
The Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, provides independent, timely, and accessible analysis of current and emerging tax policy issues for the public, journalists, policymakers, and academic researchers. For more tax facts, see http://www.taxpolicycenter.org/taxfacts.