NCPA - National Center for Policy Analysis

A Bipartisan "Yes" On A Health Care Tax Credit

July 18, 2016

Senior Fellow John R. Graham writes in NCPA's Health blog:

(A version of this Health Alert was published by RealClearHealth.)

Ready for some good news on health reform? Both the presumptive Democratic candidate for President and the Republican majority in the U.S. House of Representatives agree people should be able to spend more money directly on medical care without insurance companies meddling.

Both sides would be shocked to have their respective health reforms described as sharing any common ground. However, identifying this common ground might be necessary if either side wants to fix the worst aspects of Obamacare.

If Republican politicians in Congress want to give people any relief from the burden of Obamacare, they need to be prepared for the possibility they will have to deal with Hillary Clinton\''s White House next year.

Speaker Ryan's recently released Better Way health reform plan would offer a refundable tax credit for health care, to anyone who does not have employer-based health benefits. This tax credit would increase with age, but be available regardless of income. It would be a fixed-dollar amount for each age bracket. This is superior to Obamacare for at least two reasons.

First, as a fixed-dollar amount, instead of a proportion of premium (as under Obamacare), the tax credit would reduce insurers' incentives to increase premiums to lay even more health costs on taxpayers (which they appear to have done under Obamacare). If a beneficiary's premium is lower than the amount of the tax credit, the balance can be spent on out-of-pocket health costs (through a Health Savings Account).

Second, it would reduce the job-killing effect of Obamacare's tax credit. Notches and cliffs are terms used to describe the effect of large changes in tax rates over small ranges of income. In a study I wrote in 2015, I described Obamacare's terrible notches and cliffs. A family of four, with two 35-year-old (nonsmoking) parents and two children, earning household income of $31,270, received a tax credit of $8,987 to reduce its Obamacare premium. However, if that family's income went up by just one dollar, its tax credit would have dropped $319. That is an effective marginal income tax rate of $32,000!

The net effect of the increase in income and the decrease in tax credit would not balance until the household income reached $32,097 (at which point the increase in both income and premium is $359). Few would seek to work more hours if it resulted in no net increase in take-home pay. This perverse effect riddles Obamacare's tax credits all the way up to the income cut-off. It may be the most important reason for the stagnation of work among hourly employees.

The House Republican plan would get rid of this problem. However, with some massaging, Hillary Clinton's proposed tax credit would have a similarly beneficial effect. Clinton would offer a tax credit of up to $5,000 per family ($2,500 per individual) for out-of-pocket costs exceeding five percent of income. Like the House Republicans, she offers a fixed-dollar tax credit (although it is a maximum, limited by out-of-pocket costs). Although Clinton's tax credit would adjust with income, it would adjust at a flat rate of five percent. Effectively, this imposes a flat-rate tax, which would not impose an incentive on recipients to decline more work.

The House Republican tax credit would be instead of Obamacare's current tax credit. Clinton's tax credit would be added to Obamacare's tax credit. Adding more costs should be a non-starter. Plus, she would pay for it by hiking other taxes and imposing price controls on medicines that would likely cause capital to flee the research-based pharmaceutical industry.

Nevertheless, the tax credit is a big conceptual step forward for Hillary Clinton. In March, the Congressional Budget Office estimated subsidies in Obamacare's exchanges would be $902 billion over the next ten years. However, only 14 percent of this will cut patients' out-of-pocket costs and even that is processed through insurers, adding administrative costs.

Both House Republicans and Hillary Clinton agree (at least some) of the tax credits subsidizing health care should be spent by patients directly, instead of flowing through insurers. They also agree tax credits should be structured to minimize disincentives to work. House Republicans should never increase Obamacare spending. However, if they could agree with a future President Clinton to restructure the current tax credits so they phase out at a flat rate, and allow patients to use them for out-of-pocket costs as well as premiums, that would be a significantly positive reform to Obamacare.

 

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