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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I cant 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]!