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“The President’s Health Insurance Proposal”
Summary of Remarks by
Roberton Williams
Principal Research Associate, Tax Policy Center
The Urban Institute
February 15, 2007
Dr. 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% 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% of tax units with income of less than $10,000 per year have private health insurance, while 96% of taxpayers with incomes between $100,000 and $200,000 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% of workers with family income below 100% of poverty and 12% of those between 100% and 200% 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 ten 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. Under the plan, only 3% of taxpayers with incomes of less that $10,000 experience tax increases in 2009, while 34% of taxpayers with incomes of between $100,000 and $200,000 experience 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 funding 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.
Roberton Williams received a PhD in Economics from Stanford University in 1999, and will be Associate Professor, with tenure, at University of Texas at Austin, effective this coming September. He spoke at the joint NEC-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. His lunch slideshow and our podcast recording of his talk (NEC Podcast #5) are available here.
Rapporteur: Julie Topoleski
