NCPA - National Center for Policy Analysis


October 28, 2008

The McCain health care insurance tax credit may well be one of the most misunderstood proposals of the presidential election.  The tax credit is actually highly progressive and will provide a powerful incentive for people to purchase health insurance, but there has been a lot of misstatements, so what exactly does McCain have in mind, asks Robert Carroll, president for economic policy at the Tax Foundation.

The bottom line:

  • McCain would replace the current income tax exclusion for employer-sponsored health insurance with a refundable tax credit - $5,000 for those who purchase family coverage and $2,500 for individual coverage.
  • He would reform insurance markets to stem the growth in health insurance premiums.
  • This reduces the tax bias for large insurance policies, and because the credit is for a fixed amount, it helps break the link between the existing tax subsidy and how much is spent on health care
  • Thus, improving incentives by reducing the bias that has contributed to a high level of healthcare spending and providing a powerful incentive for people to purchase insurance.

Further, the tax cut is directed toward low and moderate income taxpayers, and will affect the uninsured:

  • According to the Treasury Department, McCain's plan can be expected to increase the number of insured by 15 million.
  • The Lewin Group, a respected private healthcare research outfit, estimated that the number of insured with be closer to 21 million.
  • It is true that many may no longer get their insurance through their employer, but they will be given the resources to purchase insurance on their own.

Moreover, the credit has important implications for the nation's future finances, says Carroll.  The elimination of the income-tax exclusion should reduce private healthcare spending and put downward pressure on the growth of Medicare and Medicaid costs.  Thus, the McCain health credit also has the potential to provide important dividends to the entitlement problem down the road.

Source: Robert Carroll, "Almost Everyone Would Do Better Under the McCain Health Plan," Wall Street Journal, October 27, 2008.

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