NCPA - National Center for Policy Analysis


January 23, 2007

In his State of the Union speech, President Bush will address one of the main causes of our current health care mess -- the highly regressive tax subsidies that encourage increasingly generous employer-provided health insurance, says Investor's Business Daily (IBD).

Under current tax law, health insurance premiums are tax-exempt if the insurance is provided through an employer.  Basically, the share of the premium paid by the employer is not counted as worker income.  So workers get a tax-free benefit, no matter how generous it is.  At the same time, those who must buy insurance for themselves face a far more limited tax break.

The tax subsidy is enormous:

  • A study published in the journal Health Affairs calculated the total at more than $208 billion for 2006, and rising fast -- it has nearly doubled since 1996.
  • Worse, the tax subsidy is hugely regressive, with the bulk going to the most well-off; those making more than $100,000 get an average tax break of $2,780, compared with just $725 for those earning $20,000 to $30,000, according to research by the Lewin Group.
  • Looked at another way, more than a quarter of the tax subsidy goes to those earning more than $150,000.

The economic distortions this system creates and the troubles it causes the health care marketplace have long been recognized: 

  • Bush's proposal would cap the tax exemption on insurance to $15,000 -- thereby at least reducing the regressiveness of today's code.
  • Then he would take the money raised by imposing this cap and use it to provide additional tax relief to those who buy insurance on their own -- letting them take $15,000 off their taxable income, even if their plans cost less, and even if they don't itemize.

Source: Editorial, "A Good Start On Health Care Reform," Investor's Business Daily, January 22, 2007.


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