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Summary:
The 109th Congress will be presented with numerous proposals to change federal tax benefits for health care. Incremental changes under consideration include a generally available tax credit for lower middle income families to purchase health insurance and additional incentives for individuals to establish Health Savings Accounts. Help for small businesses that offer insurance is also being discussed. Proponents of these and other measures generally argue that new tax benefits would reduce the number of uninsured and address efficiency and equity problems; opponents claim they often would primarily benefit higher income taxpayers and do little for most without coverage. Some argue that expanding government programs such as Medicaid would be a more effective use of government money. Proposals for more fundamental changes might emerge from discussions about general tax reform. Current law contains significant tax benefits for health insurance and expenses: (1) Most important is the exclusion of employer-paid coverage from the determination of income and employment taxes. Twothirds of the noninstitutionalized population under age 65 are insured through employmentbased plans; on average, large employers pay about 80% of their 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, even if they do not itemize deductions. (3) Taxpayers who do itemize may deduct insurance payments and other unreimbursed medical expenses to the extent they exceed 7.5% of adjusted gross income. While not widely used, this deduction benefits some who purchase individual market policies and others who pay for employment-based insurance with aftertax dollars. (4) Some workers eligible for Trade Adjustment Assistance or receiving a pension paid by the Pension Benefit Guarantee Corporation can receive an advanceable, refundable tax credit (the health coverage tax credit, HCTC) to purchase certain types of insurance. (5) Four tax-advantaged accounts are available to help taxpayers pay their health care expenses: Flexible Spending Accounts, Health Reimbursement Accounts, Health Savings Accounts; and Medical Savings Accounts. (6) Coverage under Medicare and Medicaid is not considered taxable income. (7) With some exceptions, benefits received from private or public insurance are not taxable. By lowering the after-tax cost of insurance, these 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. 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 general inflation. 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.
