NCPA - National Center for Policy Analysis

A GOOD START ON HEALTH CARE REFORM

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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