Tax Breaks Can Reduce the Number of Uninsured, But Not by Much Unless the Subsidy is Quite Large, Study Finds

Using modest tax breaks to make health insurance more affordable will prompt only a limited number of the 44.3 million uninsured Americans to purchase coverage, a study funded by the National Coalition on Health Care finds.

The study, “Health Insurance and Taxes: The Impact of Proposed Changes in Current Federal Policy,” is the first to examine in detail the possible impact of various tax policy changes on health insurance coverage and cost. The study projects the “costs” to the federal government – in lost tax revenue – of various tax breaks.

Members of Congress from both parties, as well as a number of Presidential candidates, have recently put forward plans that use tax breaks as a key mechanism to reduce the number of Americans without health insurance. Most experts agree the issue will be high on the political agenda in 2000 and 2001.

“Tax changes are going to be one thing on the table for sure, and they are a tempting way to try and expand coverage, ” says Henry E. Simmons, M.D., M.P.H., president of the Coalition. “However, tax credits alone can not solve the problem of the uninsured nor are they likely to contain the skyrocketing costs of health care. If Congress enacts tax credits absent other changes, we could end up with even more people uninsured because of higher health care costs.”

The study, conducted by The Lewin Group, Inc., examines a range of proposals, similar to those circulating in Congress and being promoted on the campaign trail. All calculations are made for the year 2000. The study finds:

• Giving people who do not have access to employer-sponsored health insurance coverage a 100% tax deduction (as recently passed by both chambers of Congress) for purchase on their own of coverage would induce 3.9 million uninsured people to buy coverage. The net cost in 2000 to the federal government: $6.3 billion, or $1,600 per newly insured person. The principal beneficiaries of such a change would be the 8.3 million people who buy coverage on their own now but get less than a 100% tax break. The deduction also tends to favor people with higher incomes. About 61% of newly insured people would have annual income of $50,000 or more. Only 5.3% would have incomes below $15,000 a year. … Giving people who lack access to employer-sponsored health insurance a flat tax credit ($500 for individuals, $1000 for family coverage) to purchase coverage on their own would induce 4.0 million uninsured Americans to obtain health insurance. The net cost in 2000 to the federal government: $5.0 billion, or $1,247 per newly insured person. The tax credit approach would provide greater benefit to lower-income Americans than the 100% tax deduction. Some 39% of the newly insured persons under this approach would have incomes of $50,000 or more; 16% would have incomes below $15,000.
• Allowing low-income workers who do not have access to employer-sponsored coverage to get a tax credit worth 30% of the cost of their health insurance would induce 1.5 million uninsured Americans to buy coverage. The net cost in 2000 to the federal government: $3.3 billion or $2,121 per newly insured person. Some 12.2 million uninsured people would be eligible for such a credit. Only 1.5 million would buy it because the price of coverage, even with the 30% credit, would still exceed their ability to pay the premium. About 2.8 million low-income people who have health insurance already would benefit from the 30% tax credit.
• Allowing all low-income workers, including those with access to employer-based coverage, to get a tax credit worth 30% of the cost of their health insurance would induce 3.3 million uninsured Americans to buy coverage. Net cost to the federal treasury in 2000: $8.3 billion, or $2,471 per newly insured person. This policy change would raise employer costs by an estimated $2.5 billion in 2000. A projected 28.3 million people would take the credit, 25 million of whom already have health insurance through their employer (22.2 million) or buy it on their own (2.8 million).
• Permitting all Americans – workers and non-workers – whose incomes fall below a certain amount ($35,000 a year for individuals, $50,000 for families) to get a tax credit for a percentage of the cost of health insurance (up to 30%) would induce 4.5 million uninsured Americans to buy coverage. Net cost to the federal treasury in 2000: $11.3 billion, or $2,530 per newly insured person. Increase in employer costs: $2.6 billion. Under this approach, 32.7 million Americans would gain some tax break. Raising the maximum percentage credit to 50% would reduce the number of uninsured by 7.1 million at a cost to the treasury of $21.9 billion. Raising the maximum tax credit to 80% would reduce the number of uninsured by 14.6 million at a federal cost of $50.2 billion.

All the above scenarios assume that the current tax exclusions for employer-sponsored health insurance would remain in place. These exclusions, which make health insurance a tax-free benefit to employees and allow “pretax” deductions for some medical expenses, will cost the federal treasury $125.8 billion in lost revenues in 2000, the Lewin study finds. The net federal costs estimated above would be on top of that $125.8 billion. These current exclusions, the study shows, primarily benefit well-off Americans and by definition accrue only to those with employer-based coverage. For example, 68.7% of that $125.8 billion directly benefits families with incomes of $50,000 or more.

To achieve a more equitable distribution of tax breaks, many experts have proposed the current employer-based exclusions be limited or replaced. The study finds:

• Limiting the tax exemption to an amount equal to the median monthly health insurance premium payment – $181 for single coverage and $429 for family coverage – would increase federal tax revenue by $12.1 billion in 2000. That $12.1 billion could then offset tax breaks targeted at the low-income uninsured. Limiting the exemption in this way means that health insurance premiums in excess of $2,172 a year for individuals and $5,148 for family coverage would be considered taxable income for employees.
• Replacing the current exemption with a flat dollar tax credit for all Americans of $400 per child and $800 per adult, up to a family maximum of $2,400, would reduce the number of uninsured by 4.6 million. The net cost to the treasury: $48.6 billion, or $10,541 per newly insured person. Around 9.8 million currently uninsured persons would be induced to buy coverage but 5.2 million currently insured persons would be induced to drop coverage now obtained through their employer because the tax credit amount would be substantially less than their current subsidy. The federal cost is high largely because the money recouped from the termination of the current exemption is offset by new costs for the uninsured and a more generous subsidy to most people who already have coverage.
• Allowing people to choose between the current employer-sponsored exemption or take a tax credit up to $2,400 for a family would reduce the number of uninsured by 9.8 million at a net cost to the federal treasury of $53.2 billion, or $5,429 per newly insured person. This approach eliminates the reduction in tax subsidies that would occur under a flat dollar credit that replaces the exemption. Workers who elected to take the credit would lose the employer coverage exemption. The cost, as above, is high because the average tax subsidy for all income groups would increase.
• Replacing the current tax exclusion of employer-sponsored coverage with a universal system of refundable tax credits, a minimum benefits package, mandatory individual coverage, and permission to employers to “cash out” their health insurance, would – in theory – reduce the number of uninsured by 43.4 million or to a negligible number. The net federal cost of such a plan, first proposed in the early 1990s by the conservative Heritage Foundation, in 2000 would be $55.3 billion or $1,274 per newly insured person. (Details of the proposal appear on pages 41-52 of the study). The most salient detail is that employers dropping health insurance as a benefit would be required to convert the value of that coverage to wages – yielding $116.1 billion in new tax revenues. Tax credits in this plan would average $1,926 per family.

The National Coalition on Health Care is the nation’s most broadly representative alliance working to improve the nation’s health and health care. Its nearly 100 member organizations include large and small businesses, labor unions, and consumer, physician, hospital, and religious groups. Former Presidents George Bush, Jimmy Carter and Gerald R. Ford serve as the Coalition’s Honorary Co-Chairs. Former Congressman Paul Rogers (D-FL) and former Governor Bob Ray (R-IA) serve as the Coalition’s Co-Chairs.

Additional copies of the study can be obtained by calling (202) 638-7151 or through the Coalition’s web site at www.nchc.org.