NCPA - National Center for Policy Analysis

Heritage: Guide To Tax Credits For Health Insurance

May 10, 2000

The number of Americans without health insurance will likely keep growing unless Congress makes adjustments in current tax policy and creates tax credits that would make coverage more affordable for the uninsured and their families, says the Heritage Foundation.

An estimated 44.3 million Americans were without health insurance in March 1999 -- and unless something is done, the Lewin Group projects the number of uninsured will grow to 54 million people in 2007.

Under current tax law, employers that sponsor group health plans may deduct their share of costs as a business expense, and the benefit provided is not included in employees' taxable income. Employees of small businesses that do not offer insurance and self-employed individuals who must purchase their own policies do not enjoy the same tax benefits.

In addition to leveling the field with respect to tax treatment, the Heritage Foundation says Congress should create refundable tax credits, subsidizing the premiums of low-income working families who purchase insurance. But the type of tax credit and the criteria for eligibility affect the cost of the credits and the "take-up" rate -- the number of individuals and families who use the credit to purchase insurance.

The Lewin Group has analyzed the cost and take-up rate of the Heritage Foundation's tax credit plan and six other proposals to provide alternative tax treatment for the purchase of health insurance.

  • It found, for example, that a tax deduction for individually purchased insurance would annually cost the federal government $6.3 billion and lead to 3.9 million people gaining coverage -- for a cost to the federal government per newly insured person of $1,559.
  • By contrast, the Heritage proposal would cost $54 billion and lead to 43.4 million gaining insurance, but at a lower average cost per person of $1,274.

Source: James Frogue, "A Guide To Tax Credits For The Uninsured," Backgrounder No. 1365, May 4, 2000, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.


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