Who Abandoned the Health Insurance Credit

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Bruce Bartlett’s post this week provided the fascinating history of the tax benefit for employer-provided health insurance. His account of the recent political economy of health care tax policy, however, left out some developments that put the issue in rather a different perspective.

As Mr. Bartlett noted, Senator John McCain in his presidential campaign proposed to change the tax exclusion into a flat credit of $5,000.  People who purchase their own health insurance do not receive the tax benefit for employer-provided coverage but would have benefited from the McCain proposal. The credit would have been refundable, providing a tax benefit for health insurance to the millions of low-income families who do not have a positive income tax liability and thus likewise do not benefit from the deduction for employer-provided insurance.

The tax credit would have made an important contribution to addressing the problem of the uninsured that is a central focus of the Affordable Care Act.  A health care “mandate” is only as meaningful as the penalty for not obeying the government’s dictate. A $5,000 refundable credit would have been economically similar to a mandate, since those not purchasing health insurance effectively would be giving up $5,000 for their household.

By contrast, the penalty under the Affordable Care Act for not taking up the mandate is as little as $95 a person in 2014, rising to $695 a person or $2,085 for a family in 2016.  With the government writing $5,000 checks to people who buy health insurance, one might have expected insurance companies to devise policies that cost exactly the amount of the credit and then to make concerted efforts to enroll people. There would have been little need for Kathleen Sebelius, the secretary of health and human services, to solicit private donations for outreach to the uninsured.

Mr. Bartlett’s post explains the merits of the McCain health insurance tax proposal.  Not mentioned in the post, however, is that attacks on the McCain proposals featured prominently in the 2008 Obama campaign.  These attacks were ironic inasmuch as the McCain tax proposal had actually been put forward by economists advising the Obama campaign.  And then even more ironic since the Affordable Care Act includes a tax on health insurance despite President Obama’s campaign stand.  Also worth noting is that the tax on high-cost insurance plans under the act maintains the link between spending and tax benefits and thus does less to improve incentives than the McCain flat tax credit.

It is striking that Mr. Bartlett’s post attributes to Republicans a “partisan political decision to abandon the McCain plan.”  Partisan political decisions did figure prominently in moving the health care debate away from the tax proposal extolled in the post. It is puzzling, however, for the critical focus here to be on Congressional Republicans.