Four Proposed Tax Changes for Health Insurance

1. Four Proposed Tax Changes for Health Insurance Bob Lyke December 5, 2008

2. Four Proposed Tax Changes • End tax exclusion for employer-provided coverage • Allow individuals a full deduction for premiums • Allow individuals a tax credit for premiums • Allow employers a tax credit for providing coverage

3. The hardest thing in the world to understand is the income tax. --- Albert Einstein

4. Some Preliminary Cautions • Generic approaches can have many variations • Small differences in specifications can have big effects • Complexity makes determining specifications difficult

5. Sources of Complexity • Identifying multiple objectives • Weighing conflicting objectives • Determining likely range of premiums

6. Ending Tax Exclusion for Employer-Provided Coverage (1) • Possible Gains --- savings could be used to finance health care reform --- could end open-ended subsidy --- could hold down growth in health care expenditures --- could reduce tax savings for higher-income families

7. Ending Tax Exclusion for Employer-Provided Coverage (2) • Possible Problems: --- may undermine employment- based insurance --- may be difficult to determine how much additional income is fairly assigned workers --- the replacement tax benefit (e.g., a tax credit) may be much more complex

8. Ending Tax Exclusion for Employer-Provided Coverage (3) • An alternative: cap the exclusion for overly generous coverage • Possible Additional Gain: --- less disruptive to current system • Possible Additional Problem: --- determining what is “overly generous” coverage

9. Full Deduction for Premiums (1) • Possible Gains: --- would be more equitable for people who buy individual market insurance --- could be relatively simple

10. Full Deduction for Premiums (2) • Possible Problems: --- would not do much to reduce numbers of uninsured --- may undermine employment- based coverage

11. Full Deduction for Premiums (3) • An alternative: allow a fixed “standard deduction” for health insurance • Possible Additional Gain: --- would limit purchase of overly generous coverage • Possible Additional Problem: --- may encourage people to purchase inadequate coverage

12. Tax Credit for Individuals (1) • Usual proposals: refundable and advanceable • Possible Gains: --- could fine-tune subsidies according to family income --- could balance competing cost and coverage objectives --- for many, could be simpler than program subsidies administered by states --- could be easy to modify

13. Tax Credit for Individuals (2) • Possible Problems: --- a flat credit (fixed percentage or amount) may not be adequate for low income families or be needed by high income --- an income-adjusted credit (with a phase-out) adds complexity --- can be difficult to integrate with employer-provided coverage --- could be difficult to target on the uninsured

14. Employer Tax Credit (1) • Usual proposals: for small businesses with low-wage workers • Possible Gains: --- could focus subsidies where many need them --- would involve fewer taxpayers than an individual credit --- could help maintain and expand employment-based coverage

15. Employer Tax Credit (2) • Possible Problems: --- low-wage workers might not be in low income families --- might be unfair to large employers with low-wage workers --- could be complicated to administer for some firms

16. Some Concluding Points • Tax provisions are tools --- choose the tool after deciding the objectives • New tax benefits involve costs --- someone will have to pay • Consider alternatives --- expanding public programs --- increasing personal expenditures

17. I can’t make a … thing out of this tax problem. I listen to one side and they seem right – and then I talk to the other side and they seem just as right, and here I am where I started. … What a job [I have]!