Effects of tax credits for health insurance

Despite rising real incomes in the USA, the number of uninsured workers and dependents has not fallen appreciably. In response, policymakers in both political parties have considered the use of tax credits to encourage the purchase of private insurance coverage.

A recent study explored the likely impact of specific tax credit options on the uninsured. It analysed the effect of various tax credits, especially for workers whose incomes place them above the poverty line but below the median family income – a group that includes the majority of the uninsured.

Among the findings:

A modest tax credit paying 50 percent of the health insurance premium would reduce the number of uninsured workers and family members with low incomes by as much as 52 percent.

A smaller tax credit offering 33 percent of the premium would reduce the number of uninsured workers and family members by 20 percent.

Most high-income workers would keep their group coverage even if offered a modest credit for individual health insurance.

A tax credit covering 33 percent of the premium would cause only 3.5 percent of high-income workers and family members to drop their group insurance.

A higher tax credit covering 50 percent of the premium would cause all high-income workers to drop their existing group coverage.

This could be avoided by limiting eligibility for the subsidy to those without employer-provided health insurance.

A carefully designed tax credit proposal could substantially reduce the number of people without health insurance while improving the equity of the tax treatment of the insured. Offering these credits to low-income people would provide the same kind of favourable tax treatment for health insurance now enjoyed by most higher-income workers.

Source: Mark V. Pauly and Bradley Herring, Cutting Taxes For Insuring: Options and Effects of Tax Credits for Health Insurance, American Enterprise Institute for Public Policy Research, June 2002.

For text http://www.aei.org/shop1/shops/1/7160-0.pdf
For more on Tax Credits http://www.ncpa.org/iss/tax/

FMF Policy Bulletin\3 September 2002