February 2007 Monthly Luncheon
“An Evaluation of the President’s Health Insurance Proposal”
Roberton Williams, Principal Research Associate, Tax Policy Center, The Urban Institute
Review by Julie Topoleski, Congressional Budget Office*
Roberton Williams, of the Tax Policy Center at the Urban Institute, spoke at the SGE lunch on February 15, 2007 to discuss findings from a new Urban Institute report: The President’s Proposed Standard Deduction for Health Insurance: An Evaluation (co-authored with Leonard E. Burman, Jason Furman and Greg Leiserson). The full report is available at http://www.urban.org/url.cfm?ID=411423.
Williams began his talk with a review of the current law tax treatment of employer-provided health insurance. Under current law, employer-provided health insurance is untaxed; the employer deducts health insurance premiums and the premium is untaxed for the worker. In addition, out-of-pocket health costs can be untaxed via flexible spending accounts or health savings accounts. Further, high medical costs are deductible for income tax purposes if they exceed 7.5 percent of the taxpayer’s adjusted gross income. These tax benefits rise with the tax rate. There are fewer tax benefits for those who purchase private insurance,: in particular, they generally cannot deduct their health insurance premiums for income tax purposes.
Income is a major determinant of private coverage. Currently, there are 47 million uninsured people in the United States at some point during the year, and Williams showed that as income rises, the percentage of tax units with private coverage increases sharply. Only 24 percent of tax unites with income of less than $10 thousand per year have private health insurance, while 96 percent of taxpayers with incomes between $100 and $200 thousand have private health insurance. Presumably, most high-income taxpayers without health insurance do so voluntarily. Existing government assistance programs provide insurance coverage for a fraction of low income people. For example, 19 percent of workers with family income below 100 percent of poverty and 12 percent of those between 100 and 200 percent of poverty receive public health insurance.
Having outlined the existing state of health insurance in the U.S., Williams described what he sees as the goals for the health insurance market. These include encouraging insurance for all but not being overly generous; using strategies to constrain cost; encouraging risk pooling; aligning incentives; and aiding the poor and vulnerable.
It is within this framework that Williams turned to evaluate the new health insurance proposal set forth by President Bush in his 2007 State of the Union address. The President’s plan would remove the current tax treatment of employer provided health insurance and replace it with a standard deduction for health insurance of $15,000 for couples and $7,500 for single taxpayers beginning in 2009. The deduction would apply to both income and payroll taxes as well as to the Alternative Minimum Tax (AMT). Employer-paid health insurance premiums would be counted as earnings, and the plan would eliminate most other tax subsidies for health expenditures, including the existing tax treatment of flexible spending accounts. The proposal does not, however, change the tax treatment of health savings accounts, which are generally used by those at the top of the income distribution. The plan would also index the standard deduction by the Consumer Price Index (for all goods, not health costs) and give individual states incentives to organize non-group risk pools.
Williams described the President’s plan as innovative and fiscally responsible, but at the same time full of risk. Williams reported “the good” of the plan: it levels the playing field, removes incentives to over-insure, addresses problems in the non-group market, and is revenue neutral over 10 years. He also described “the bad”: the plan removes employer incentives to offer health insurance, gives a greater tax subsidy to high-income taxpayers, threatens current risk pooling, and includes insufficient indexing. Finally, he described “the ugly”: it preserves health savings accounts, includes no clear plan to improve non-group markets, and could make low-income families worse off.
Williams then described the details of the President’s plan and where it may fail to meet the goals outlined earlier. He showed that the tax subsidy in the plan favors high income people and doesn’t do enough for low income households. Williams went one step further to say that it may actually harm low-income households. When looking at who benefits from the plan, however, there are both winners and losers. While Williams attempted to show that the losers are low income taxpayers, it actually appears that those at the high end of the distribution lose out. The losers are more likely to be higher income taxpayers. Only 3 percent of taxpayers with incomes of less that $10,000 experience tax increases in 2009 under the plan, and that fraction increases with income with 34 percent of taxpayers with incomes of between $100,000 and $200,000 experiencing tax increases. The vast majority of low income tax payers see no change in taxes under the plan. The income range over which tax refunds are smaller under the President’s plan for a taxpayer who is married, filing jointly with two children is between $17,000 and $30,000 and the example excludes the effect of reduced payroll tax under the plan.
Finally, Williams spoke about what could be done to fix the President’s plan. The suggestions included providing a refundable credit or health insurance voucher rather than a tax deduction, conditioning a credit or voucher on states establishing effective risk-pooling arrangements in the non-group market, providing additional fund- to expand coverage for at-risk individuals, and eliminating health savings accounts. His bottom line was that the plan was a good start to addressing health insurance problems but that it needs modification to provide a fair and effective solution.
* The views expressed in this summary are those of the author and should not be interpreted as those of the Congressional Budget Office.