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Commentary

Health Care Tax Credits: Designing an Alternative to Employer-Based Coverage
Nina Owcharenko, Heritage Foundation, 11-9-05

Owcharenko argues that “any serious tax reform” should look at how “changing the tax treatment of health insurance” can help uninsured Americans get access to affordable coverage through tax credits. But this effort will only succeed if Americans understand how today’s employer-based health care tax exemption distorts the cost and efficiency of health care markets.

Today’s tax code distorts the health care market and creates inequities in the system. The President’s Advisory Panel on Tax Reform was correct to recommend capping the exclusion for employer-based coverage. However, another critical measure is needed to right this wrong and make health care coverage more affordable—health care tax credits.
Congress must act now, building upon the recommendations of the Advisory Panel, to create an alternative to the current system. Health care tax credits can help to “level the playing field” for those—especially lower-income individuals—who do not fit into today’s patchwork health care system by giving them a tax subsidy that is at least comparable to that offered to those in the current structure. However, Members of Congress must be very careful about how they develop and design a tax credit proposal. The impact of the credits, for good or ill, will depend largely on these design details and policy decisions.

Americans take it for granted that employers are supposed to provide health care coverage. But this state of affairs is an anachronism left over from World War II, when price controls prevented companies from boosting wages. Employer-provided health care, in other words, is disguised income that could be spent more effectively by employees and their families. Changing the tax code would help make health insurance more affordable, and help slow the growth of health care spending.



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