Benefits with Risks — Bush's Tax-Based Health Care Proposals (New Eng Jour Med)

Volume 356:1393-1395 April 5, 2007 Number 14

Benefits with Risks — Bush's Tax-Based Health Care Proposals

Robert D. Reischauer, Ph.D.

In his State of the Union address in January, President George W. Bush announced a major two-part health initiative that would create a new uniform tax deduction for all those obtaining health insurance and provide assistance to states that make basic private health insurance available to residents (see box). The first and primary proposal addresses the tax code's perverse and inequitable treatment of health care expenditures, seeking thereby to reduce the ranks of the uninsured.1 If adopted as proposed (a highly unlikely prospect), the initiative would take half a step toward a more equitable system, but it would have an uncertain effect on the expansion of coverage and could expose insured Americans to some significant risks.

Currently, neither compensation in the form of employer-paid health insurance premiums nor health expenses and premiums paid by workers through cafeteria plans are subject to income or payroll taxes. In addition, U.S. taxpayers who itemize their deductions may take an income-tax deduction for out-of-pocket health care spending exceeding 7.5% of their income. These provisions create an open-ended subsidy for certain types of health care spending that has encouraged the purchase of generous employment-based insurance and excessive spending. In the face of spiraling health care costs, such encouragement seems perverse.

The provisions are also inequitable. Because the value of the tax benefit depends not just on the amount spent on insurance and health care but also on a taxpayer's marginal tax rate, the benefit is worth more for upper-income than lower-income taxpayers. When a firm contributes $10,000 toward its employees' insurance, workers in the 15% tax bracket receive a $1,500 income-tax subsidy, whereas those in the 35% bracket get a $3,500 subsidy. The fact that the benefit is available only to people with employer-sponsored policies results in an additional inequity: those whose employers do not offer health plans get no subsidy — they must buy their coverage with after-tax dollars.

Under Bush's proposal, these subsidies would be scrapped starting in 2009, and employers would be required to include the amounts they contribute toward health insurance premiums in their workers' taxable compensation. However, everyone enrolled in a "qualified" health plan, whether obtained through an employer or purchased independently, would be given a new standard deduction for health insurance — $15,000 for a family and $7,500 for an individual — that would reduce the portion of their income that is subject to both income and payroll taxes.

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Source Information

Dr. Reischauer is the president of the Urban Institute, Washington, DC.

An interview with Congressman Pete Stark (D-CA) and Senator Chuck Grassley (R-IA) can be heard at http://www.nejm.org.

The New England Journal of Medicine is owned, published, and copyrighted © 2007 Massachusetts Medical Society. All rights reserved.

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