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In January 2007, President George W. Bush proposed a tax policy designed to encourage more Americans to buy relatively economical health insurance.
How would the plan affect your health insurance options and tax bill? Though the president’s plan is simple in outline, its effects are complex.
What the President’s Plan Would Do
The crux of the proposal is to apply income tax to the value of health insurance premiums that employers pay on workers’ behalf, while at the same time giving all Americans -- employed, self-employed or unemployed -- a fixed tax deduction for health costs: $7,500 for a single plan, $15,000 for family coverage. (The average family group plan cost $11,480 in 2006, according to the Kaiser Family Foundation; that number is expected to rise to about $13,600 in 2009, when the plan would go into effect.)
Individuals, whether they buy their own insurance or receive it through employers that pay all or part of the premium, would come out ahead if their premiums are less than the allowed deduction. Conversely, people who choose or must live with a plan whose premiums are higher than the deduction would pay taxes on the difference.
According to plan proponents, such a system would encourage Americans to become more discerning healthcare consumers. “We’re purchasing healthcare that isn’t worth what it costs,” says Michael Cannon, director of health policy studies at the Cato Institute. “This makes healthcare unaffordable for many. The new plan eliminates this inefficiency and distortion.”
But the plan’s numerous opponents say it wouldn’t do enough to substantially reduce the rolls of the nation’s nearly 45 million uninsured. “It’s important to give the president credit for highlighting the existing tax break for employers and their workers, but this plan is not up to the scale of the problem,” says Jacob Hacker, a Yale University political science professor and author of The Great Risk Shift: The Assault on American Jobs, Families, Health Care and Retirement.
How Would the Plan Alter Employers’ Attitudes Toward Health Insurance?
Some observers worry the president’s plan would encourage employers to stop providing health insurance to their workers.
“Younger, healthier people may see they can go out on the individual market, get a great tax benefit and pay a lot less for insurance,” says Elise Gould, an economist with the Economic Policy Institute. “But the premiums for those left in the employer plan will rise even faster. So employers may say to workers, ‘The premiums are too high -- you have to go out on your own.’”
Others see the Bush plan as part of a broader effort to shift costs to workers. “This plan enables employers to accelerate the process of washing their hands of providing a basket of benefits,” says Robert Cimasi, president of Health Capital Consultants.
Still, some say labor market forces will keep employers in the business of providing health insurance. “Employers offer health benefits for a competitive advantage,” says Frank McArdle, a principle with Hewitt Associates, a human resources consulting firm.
Effects on Workers Would Vary
How would President Bush’s proposal affect you? It depends mostly on the value of your health insurance.
About 20 percent of employees’ health plans initially would fall above the $7,500 or $15,000 tax-deduction ceiling, so those workers would see higher tax bills, according to one estimate. Those who stand to lose include anyone with a rich health-benefits package, such as professionals in blue-chip firms and union workers.
Workers with more modest plans -- say, $10,000 for family coverage -- would see a net gain because they’d be entitled to the full $15,000 deduction, even though the deduction exceeds the value of their insurance.
But in future fiscal years, an increasing number of Americans would likely pay more tax on their insurance, because the deduction would not increase as quickly as healthcare costs. Since 2000, the consumer price index, a measure of general inflation, has risen 1.6 percent to 3.4 percent annually, according to Hewitt. By contrast, healthcare costs have risen from 7.9 percent to 15.2 percent annually over the same period.
The proposal would be of little or no benefit to the 55 percent of the uninsured who had such low incomes in 2005 that they paid no income taxes. Likewise, the tax break would probably not be enough to enable moderate-income workers without Medicaid or employer-paid coverage to afford insurance.
Read our expert commentary and discuss your concerns about health insurance on our special Health Insurance Anxiety message board.
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