NCPA - National Center for Policy Analysis

USING TAX CREDITS TO COVER THE UNINSURED

July 15, 2005

Thanks to the 2002 Trade and Adjustment Act, which offers a tax credit to workers who have lost either their jobs or pension coverage as a result of foreign competition, Kansas legislators now offer tax credits to encourage small business owners to offer health coverage to their employees. Next, they will offer similar credits to the uninsured -- those who are most in need of coverage, say observers.

But the tax credit program is underutilized and currently reaches only five percent of potential enrollees nationally. In Kansas, just over one percent receive tax credits.

As the National Center for Policy Analysis (NCPA) has discovered, tax credits suffer from three main problems:

  • First, Congress mandated that policies must be issued regardless of medical background, resulting in higher costs for all; consequently, insurance companies must increase rates, individuals are priced out of the market, competition within the industry suffers and prices increase even further.
  • Then Congress chose to severely limit the potential pool of eligible participants; only those near retirement and living on meager unemployment benefits were eligible, further reducing the likelihood of business participation.
  • Finally, the program operates on a percentage basis rather than a flat dollar amount; in effect, this works against consumers who would otherwise behave in a cost-conscious manner to find the best policy at the lowest rate.

Since only a small number of people are eligible, Kansas policymakers should expand the pool of participants to create a viable market that encourages private insurance and ensures better coverage, say observers. This will allow the state's economy to become more competitive.

Source: Matthew Hisrich, "Using Tax Credits to Cover the Uninsured," Flint Hills Center for Public Policy, May 4, 2005.

 

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