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Howard Gleckman
May 21, 2009

GOP Health Reform: Surprise, A Big Tax Cut

Yesterday, conservative Republicans rolled out their health reform plan. The Patient’s Choice Act is an interesting mix of Massachusetts-like exchanges and other reforms intended to boost the individual insurance market. But, no surprise, its centerpiece is a giant tax cut.

 

The tax plan is not new. It is, in fact, a version of John McCain’s presidential campaign plank. The measure, sponsored by Senator Tom Coburn (R-OK) and Representative Paul Ryan (R-WI) would replace the exclusion for employer-provided health insurance with a generous tax credit ($2,300 for individuals and $5,700 for families). The price tag for the McCain version (a refundable credit of $2,500 and $5,000): $1.3 trillion over 10 years.

 

A credit subsidizes taxpayers of all incomes more or less equally (unlike the exclusion, which is worth more to high-bracket workers). And it is a very sweet deal, at least at first. For someone in the 25 percent bracket, a $5,700 credit is worth roughly as much as the exclusion for a $23,000 insurance policy. You can buy a lot of insurance for $23,000—perhaps too much.  

 

However, the GOP proposal is silent on two key issues: Will the credit be refundable and how will it adjust for inflation?

 

If the credit is not be refundable, as McCain’s was, the plan would be much less expensive, but would also leave millions of low-income workers without a subsidy. If it is refundable, the cost would likely be close to McCain's version--$1 trillion or so. Supporters say Coburn and Ryan also favor a separate $5,000 cash grant to help very low-income people buy private insurance in lieu of Medicaid.        

 

Then there is the matter of whether the credit would be indexed for inflation and, if so, how? When TPC estimated the effects of the McCain plan, it assumed the credit would rise with the consumer price index. Because the CPI increases more slowly than medical costs, the value of the credit would gradually decline.

 

Unfortunately, the McCain version would not have done much to increase the number of Americans with health insurance. About 21 million more people would get insurance in the individual market, but 20 million would lose employer coverage once the exclusion is killed. In all, a lot of aggravation for very little benefit.

 

Still, McCain, Coburn, and Ryan are on to something here. It makes sense to start phasing out the exclusion while expanding the credit. The problem is that, at least for now, there is no real individual market where people can buy insurance.

 

To build one, the GOP bill borrows from, gasp, Hillary Clinton, by proposing regional purchasing pools and requiring insurance companies to sell to all comers regardless of their health. But the plan includes only a vague and complex proposal to restrict the ability of carriers to cherry pick the healthiest customers, and no mandate to buy. A lot of holes still need to be filled in.

 

However, the optimist in me (yes, he’s in there someplace) says if Tom Coburn and Paul Ryan can talk about exchanges and guaranteed coverage along with a new health care tax structure maybe there is a deal to be done after all.       

    

 

 

Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.

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Individual Taxes Individual Taxes

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