NCPA - National Center for Policy Analysis

Health Insurance Tax Credits Achieve Tax Equity

February 21, 2002

About 40 million Americans lack health insurance -- a number likely to increase with the economic downturn. Political will is increasing across party lines to address some of the underlying issues that exacerbate a lack of insurance -- namely, that those workers with high incomes receive government tax subsidies while lower income workers do not. Those with low incomes often qualify for government programs while moderate-wage workers do not.

Since taxpayers are not willing to finance care for all who lack coverage, a tax credit might boost the numbers of the subgroup taxpayers are willing to subsidize. A tax credit would also provide tax equity for those whose incomes are too high for Medicaid but too low to receive the value of a tax subsidy when taking up employer-sponsored health insurance.

A tax credit could selectively target just those segments of the uninsured population who might purchase insurance if assisted. That is because the uninsured include people throughout the income range:

  • About one-third of the uninsured have incomes that are less than 125 percent of the federal poverty line, and many have access to government programs when needed.
  • Forty percent have incomes between 125 percent and 300 percent of the poverty line.
  • And just over one-fourth of the uninsured have incomes above 300 percent of the federal poverty line.

Tax credits have their critics, however. Some worry that by neutralizing the current tax bias towards employment-based health insurance, tax credits might harm workers at high-risk for medical problems by fragmenting the insurance pool. Another worry is that low-risk workers might join lower-risk insurance pools, thus unraveling the entire system of employment-based health insurance where low-risk workers subsidize high-risk ones.

Source: Mark V. Pauly and John S. Hoff, "Responsible Tax Credits for Health Insurance", (Washington, D.C.: AEI Press, 2002).


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