NCPA - National Center for Policy Analysis

HEALTH REFORM FRINGE BENEFITS

February 5, 2007

How will President Bush's health insurance plan affect taxpayers?  The answer depends on if they have medical coverage, where they get it and how much it costs.  The president wants to eliminate the tax code's bias in favor of employer-provided medical coverage, which distorts the insurance market, promotes insecurity and raises health care costs, says the Washington Times.

This bias was created more or less by accident:

  • During World War II, businesses competing to attract scarce workers got around wage and price controls by offering health insurance instead of higher pay.
  • In 1943, the Internal Revenue Service decided not to count this increasingly popular fringe benefit as taxable income, a policy codified by Congress in 1954.

According to John Goodman, president of the National Center for Policy Analysis:

  • Someone in the 25 percent income tax bracket may receive a subsidy of close to 50 percent for employer-provided medical coverage, once you consider state income taxes and the 15.3 percent payroll tax that funds Social Security and Medicare. 
  • If he buys insurance on his own, he typically gets no tax break at all.
  • The upshot is that most Americans get medical coverage through their employers.

In a system based on employer-provided insurance, people lose their medical coverage when they lose their jobs, a problem that becomes increasingly serious as they get older and sicker.  At the same time, the seemingly free coverage makes health care more expensive for everyone.

Bush's solution to these problems is straightforward.  He would reverse the policy of excluding health insurance from taxable income.  To avoid an overall tax increase, he would give taxpayers with health insurance a standard deduction of $7,500 for individuals and $15,000 for families.

Source: Jacob Sullum, "Health reform fringe benefits," Washington Times, February 3, 2007.

 

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