The voices of Tax Policy Center's researchers and staff
What if we helped pay for health reform by raising the floor on deductible medical expenses from 7.5 percent of adjusted gross income to 10 percent? That, at least, is an idea leaked to The Wall Street Journal earlier this week by the Senate Finance Committee
The move, which TPC figures would raise about $23 billon over 10 years--about 2 percent of the likely cost of health reform--would lift the floor that was set back in 1986. To get a sense of what it would mean, I asked TPC’s Jeff Rohaly and Rachel Johnson to run some quick numbers.
But first, here’s how the deduction works today: Few taxpayers qualify for the medical expense deduction—only about 6 percent. Those facing catastrophic medical costs will get an average tax benefit this year of about $1,000, while those who benefit the most—taxpayers making more than $1 million--come away with almost $8,000.
It is no surprise that the wealthy do best in this structure. They always do with deductions, as opposed to credits. In addition, I suspect that thanks to the advice of accountants and lawyers, higher income taxpayers are better positioned to time discretionary medical expenses to take maximum advantage of the deduction.
The other folks who do relatively well with this tax break are seniors. Almost 11 percent take some advantage of the deduction, twice the population at large, and they get an average deduction of $1,500. Most are clustered at incomes of between $50,000 and $200,000. Almost one-third of those making between $75,000 and $100,000 take a medical deduction, and they get an average benefit of about $1,200. Top-bracket seniors do far better. Those making between $500,000 and $1 million enjoy an average tax benefit of more than $6,500, while those earning $1 million-plus get about $9,500.
Raising the floor on tax-deductible medical expenses would chip away at some of those subsidies, but not by much. One reason may be that those hit by the Alternative Minimum Tax already face the 10 percent floor. So, for them, the change won’t matter.
Here are a few numbers: Most of those who get nicked are in the $50,000 to $200,000 income range. They’d face almost three-quarters of the tax increase. But on average, those making between $50,000 and $75,000 would lose only about $170 in tax benefits, while those making between $100,000 and $200,000 would lose roughly $450. At the very top, those making more than $1 million would lose more than half of their tax break, but would still end up saving $4,500.
Bottom line: This proposal will stir a major fuss in return for relatively little money. Replacing the entire patchwork system of health care tax breaks with a single credit, as John McCain and others have proposed, might make a lot more sense. But that idea doesn’t seem to be on the table.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.