Thursday, November 18, 2004
Tax reform and health care reform go hand in hand
[Greg Scandlen and Grace-Marie Turner, "The Importance of Tax Reform ," Joint Issue: Consumer Choice Matters and Health Policy Matters, The Galen Institute, 18 November 2004.]
The bias in the tax code toward employer-based coverage treats the self-employed and unemployed unfairly and distorts the marketplace. With the President weighing the benefits of overhauling the tax structure, The Galen Institute offers the following suggestions to improve the situation:
Equality. Some have proposed making all health care spending tax free to level the playing field between employer-sponsored health insurance, individually-purchased health insurance, and direct payment for health care services. This would enable consumers to make more rational decisions about the best way to finance health care services. The role of third-party payment would be reduced and direct payment would increase. New forms of financing -- through savings accounts or credit arrangements-- would evolve. Administrative waste would be reduced as consumers would seek the most efficient payment mechanisms.
Lower the AGI threshold. Others have advocated lowering the threshold for the medical expense deduction from 7.5% of AGI to zero. All Section 213(d) expenses would be deductible. Of course, such a deduction doesn't account for the payroll taxes avoided by the exclusion of employer-sponsored health insurance, so it would not be very attractive or helpful to lower-wage workers. As mentioned above, any deduction is worth less to lower-income people because they are in lower tax brackets.
Credits for all. Another idea would be to partially subsidize health care spending but extend the same subsidy to all Americans, regardless of how they finance health care services. Congress could, for instance, provide a tax credit to every adult and child to pay for health insurance. Lower-income people or those with extraordinary needs could be eligible for additional funds, possibly from state coffers. A worker whose employer provided coverage would have to pay taxes on the value of the insurance, but those new taxes could be largely offset by the value of the credit. Individuals who did not avail themselves of the credit would automatically get coverage through a safety net mechanism, funded largely by the credit that would otherwise go to them.
Tax cap. Congress could continue to allow the exclusion for employer-sponsored health insurance, but cap the tax subsidy at some reasonable level so that only an average premium would be excluded from income. Richer benefits could be purchased, but only with after-tax money.
Remove the tax preference. A more Libertarian approach would remove any and all tax advantages from health care spending so that health care would compete on an equal footing with every other way we might spend our money. Employers could still provide health coverage, but workers would have to pay taxes on the value of the benefit. This would be especially appropriate if we moved to a system of consumption taxes in which all savings are free of taxes but all spending is done with taxable dollars.
Defined contributions for all. Yet another idea has come from the movement toward defined contribution approaches to benefits in both the public and private sectors. Funds currently spent on a list of covered services would be available to consumers to buy benefits and insurance packages of their own choosing. The funds could be made available on a need-adjusted basis so that older, sicker, and poorer people would receive a larger contribution than others. Employers are already moving in this direction, first with pension programs, then with retiree medical benefits, and more recently with health coverage for active employees. Some states are exploring this approach with "Cash & Counseling" Medicaid waiver projects, and Medicare, too, is giving seniors the option of a "premium support" financing system.
The Consensus Group has agreed that the health care market "is distorted by a tax policy that is mistargeted, miscalibrated, and open-ended. This tax policy provides generous benefits to those who have higher incomes and receive health insurance through the workplace. Yet it offers little or no assistance to those at the lower end of the income scale."
Any of these approaches would be an improvement over the current system. All would result in a more efficient and more equitable system of health care financing than we currently have. Obviously they would all need to be carefully designed to minimize the shock of sudden change and to ensure that the most vulnerable Americans are protected. We might want to have a ten-year phase-in or move selected population groups before others. We might want to try several approaches on a limited demonstration basis to get some empirical information on what works best.
But we have before us a unique opportunity to re-invent our system of health care financing. We need a full, vibrant, and informed debate over the best way to strengthen and revitalize the health care market.
[Greg Scandlen and Grace-Marie Turner, "The Importance of Tax Reform ," Joint Issue: Consumer Choice Matters and Health Policy Matters, The Galen Institute, 18 November 2004.]
The bias in the tax code toward employer-based coverage treats the self-employed and unemployed unfairly and distorts the marketplace. With the President weighing the benefits of overhauling the tax structure, The Galen Institute offers the following suggestions to improve the situation:
Equality. Some have proposed making all health care spending tax free to level the playing field between employer-sponsored health insurance, individually-purchased health insurance, and direct payment for health care services. This would enable consumers to make more rational decisions about the best way to finance health care services. The role of third-party payment would be reduced and direct payment would increase. New forms of financing -- through savings accounts or credit arrangements-- would evolve. Administrative waste would be reduced as consumers would seek the most efficient payment mechanisms.
Lower the AGI threshold. Others have advocated lowering the threshold for the medical expense deduction from 7.5% of AGI to zero. All Section 213(d) expenses would be deductible. Of course, such a deduction doesn't account for the payroll taxes avoided by the exclusion of employer-sponsored health insurance, so it would not be very attractive or helpful to lower-wage workers. As mentioned above, any deduction is worth less to lower-income people because they are in lower tax brackets.
Credits for all. Another idea would be to partially subsidize health care spending but extend the same subsidy to all Americans, regardless of how they finance health care services. Congress could, for instance, provide a tax credit to every adult and child to pay for health insurance. Lower-income people or those with extraordinary needs could be eligible for additional funds, possibly from state coffers. A worker whose employer provided coverage would have to pay taxes on the value of the insurance, but those new taxes could be largely offset by the value of the credit. Individuals who did not avail themselves of the credit would automatically get coverage through a safety net mechanism, funded largely by the credit that would otherwise go to them.
Tax cap. Congress could continue to allow the exclusion for employer-sponsored health insurance, but cap the tax subsidy at some reasonable level so that only an average premium would be excluded from income. Richer benefits could be purchased, but only with after-tax money.
Remove the tax preference. A more Libertarian approach would remove any and all tax advantages from health care spending so that health care would compete on an equal footing with every other way we might spend our money. Employers could still provide health coverage, but workers would have to pay taxes on the value of the benefit. This would be especially appropriate if we moved to a system of consumption taxes in which all savings are free of taxes but all spending is done with taxable dollars.
Defined contributions for all. Yet another idea has come from the movement toward defined contribution approaches to benefits in both the public and private sectors. Funds currently spent on a list of covered services would be available to consumers to buy benefits and insurance packages of their own choosing. The funds could be made available on a need-adjusted basis so that older, sicker, and poorer people would receive a larger contribution than others. Employers are already moving in this direction, first with pension programs, then with retiree medical benefits, and more recently with health coverage for active employees. Some states are exploring this approach with "Cash & Counseling" Medicaid waiver projects, and Medicare, too, is giving seniors the option of a "premium support" financing system.
The Consensus Group has agreed that the health care market "is distorted by a tax policy that is mistargeted, miscalibrated, and open-ended. This tax policy provides generous benefits to those who have higher incomes and receive health insurance through the workplace. Yet it offers little or no assistance to those at the lower end of the income scale."
Any of these approaches would be an improvement over the current system. All would result in a more efficient and more equitable system of health care financing than we currently have. Obviously they would all need to be carefully designed to minimize the shock of sudden change and to ensure that the most vulnerable Americans are protected. We might want to have a ten-year phase-in or move selected population groups before others. We might want to try several approaches on a limited demonstration basis to get some empirical information on what works best.
But we have before us a unique opportunity to re-invent our system of health care financing. We need a full, vibrant, and informed debate over the best way to strengthen and revitalize the health care market.
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