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Summary:
At the start of the 107th Congress, a number of new or expanded tax benefits for health insurance are being discussed. Proponents generally argue that changes are needed to extend coverage to the uninsured and to address efficiency and equity problems; opponents generally doubt that the changes under consideration would make much difference. One overarching issue is whether new or expanded benefits would limit the reductions in general tax rates that President-elect Bush and others seek. 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 taxes. (Employer-paid health insurance is also excluded from employment taxes.) Nearly two-thirds of the noninstitutionalized population under age 65 is insured through employment-based insurance; 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) Selfemployed taxpayers may deduct 60% of their health insurance payments, a proportion scheduled to rise to 100% in 2003. (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 employmentbased insurance (for the employee share), some self-employed (the remaining 40% of their cost) and others who purchase individual market policies. (4) Coverage under Medicare and Medicaid is not considered taxable income. (5) With some exceptions, benefits actually 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 the way in which 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 employment-based 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 why prices for health care have risen more rapidly than the general rate of 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 consumpt ion, 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.
