NCPA - National Center for Policy Analysis

Tax Credits For Uninsured

December 21, 1999

A tax credit of sufficient size could significantly decrease the number of uninsured Americans. But too small a credit, or a mere tax deduction for health insurance would have little or no effect, says Mark Pauly of the University of Pennsylvania, a leading health economist.

  • A credit equal to half the cost of insurance could reduce the number of uninsured in working families with incomes between 200 percent and 250 percent of the poverty level by 40 percent to 70 percent, says Pauly.
  • Smaller credits, even those of 25 percent , just aren't going to do any good.
  • Tax deductions for health insurance would be even less helpful -- since 45 percent of the uninsured pay no income taxes.
  • Another 45 percent are in the lowest, 15-percent-tax bracket, and they would benefit little from a deduction.

But other analysts warn that while using the tax code to help reduce the number of uninsured is attractive, it may not be as easy as many policymakers seem to think. They say tax-based alternatives continue to court serious risks that may not be worth taking.

Among those risks, according to Henry Aaron of the Brookings Institution, is the fragmentation of the risk pool -- in which healthier people would band together, making insurance unaffordable for the older and sicker. Also, tax credits would greatly increase the number of people in the individual insurance market -- which, without significant new regulation, cannot spread risks.

A key backer of tax credit approaches, Stuart Butler of the Heritage Foundation, says that tax credits and individual market reforms need to come simultaneously.

Source: Julie Rovner, "Tax Credits For Uninsured Hailed, Blasted," Reuters Health, December 20, 1999.


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