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Summary:
The 108th Congress is considering a number of new or expanded tax benefits for health insurance. New individual tax credits have been proposed to help people without insurance purchase coverage, as have new tax credits for employers. Legislative activity has recently occurred on measures to expand insurance options qualifying for the existing tax credit for trade-displaced workers (H.R. 1528) and to authorize tax-advantaged savings accounts similar to medical savings accounts (H.R. 2351). Proponents of these measures generally argue that new tax benefits are needed to reduce the number of uninsured and to address efficiency and equity problems; opponents generally claim they would primarily benefit higher income taxpayers and do little for those now without coverage. Current law contains significant tax benefits for health insurance. (1) Most important is the exclusion of employer-paid health insurance from the determination of income and employment taxes. Over 2/3 of the noninstitutionalized population under age 65 are insured through employment-based plans; on average, large employers pay about 80% of its cost, though some pay all and others none. The exclusion also applies to health insurance provided through cafeteria plans. (2) Self-employed taxpayers may deduct 100% of their health insurance payments, up from 70% in 2002. (3) Taxpayers who itemize deductions may deduct insurance payments to the extent they and other medical expenses exceed 7.5% of adjusted gross income. While not widely used, this deduction benefits some with employment-based insurance (for the employee share), some selfemployed (the remaining 30% of their 2002 cost) and others who purchase individual market policies. (4) Some workers displaced by trade or receiving a pension paid by the Pension Benefit Guarantee Corporation can receive an advanceable, refundable tax credit to purchase certain types of insurance. (5) Coverage under Medicare and Medicaid is not considered taxable income. (6) With some exceptions, benefits received from private or public insurance are not taxable. By lowering the after-tax cost of insurance, the tax benefits help extend coverage to more people; they also lead insured people to obtain more coverage than otherwise. The incentives influence how coverage is acquired: the uncapped exclusion for employer-paid insurance, which can benefit nearly all workers and is easy to administer, is partly responsible for the predominance of employmentbased insurance in the United States. Employment-based insurance has both advantages and disadvantages for the typical worker. The tax benefits also increase the demand for health care by enabling insured people to obtain services at discounted prices. This is one reason health care prices have risen more rapidly than the general inflation rate. Moreover, since many people would likely obtain some insurance without the tax benefits, they can be an inefficient use of public dollars. They also raise questions of equity, largely because the tax savings they generate depend upon the taxpayer's marginal tax rate. When viewed as a form of personal consumption, giving tax incentives for health insurance provides more benefits to higher income families who may not need them. Comprehensive reforms (e.g., capping the employer exclusion or replacing it with deductions and credits) might address some of these concerns, though they could be difficult to implement and may cause serious inequities of their own.
