Health Tax Credits
Recommendation
Provide $1,000 per person (up to $4,000 per family) refundable tax credits to individuals who purchase health insurance in the non-group market.
Background
Employers and insurance coverage
• Sixty percent of non-elderly Americans have insurance through their employer, while just nine percent purchase insurance on their own.
• Employer-based health insurance is an anomaly of World War Two-era wage controls and IRS rules that did not count benefits as wages.
• Self-employed persons, those whose employers do not provide them insurance, and those who choose to purchase a more suitable policy for their needs must pay income taxes, payroll taxes, or both, on top of the money they use to buy insurance.
Tax problems
• The tax exemption for employer-provided insurance is worth more to those with higher incomes and higher tax rates.
• North Carolina can address this problem in the federal tax code with state tax credits for individuals who purchase insurance in the non-group market.
Insurance options exist
• Research suggests that if more people knew their options, they would purchase insurance on their own.
• A 45-year-old male in Raleigh can find, for example, 58 plans through ehealthinsurance.com with premiums as low as $95 per month. Blue Cross/Blue Shield offers a number of plans, including an HSA with premiums of $101 per month.
• Coverage for a family of four with two teenage children is available for as little as $218 per month.
Why Health Tax Credits Are Needed
• Current federal tax law is unfair. Individuals with higher incomes receive more benefit from tax exemption because of the progressive tax rates at the state and federal levels.
• Tying insurance to employment is inefficient and ineffective, with the following ill effects: 1) Job lock. Employees stick with a job to keep insurance, which limits innovation and growth throughout the economy. 2) More uninsured. When a person switches jobs, COBRA coverage can be too expensive to purchase and insurance through the new employer may have a waiting period, so the number of uninsured grows. 3) Product mismatch. With few options available from their employer, workers have too much or too little insurance for their needs. They also may have to change doctors when their employer changes plan options. 4) Third-party payment. Health insurers and government pay 86 percent of medical costs, leaving just 14 percent for the individual to pay. This influences individuals to choose more — and more expensive — care, tests, and medications. 5) Higher health care prices and health insurance premiums for all.
• Health credits can complement the tax advantages of Health Savings Accounts (HSAs). HSAs provide individuals with affordable health insurance and the ability to save for future long-term care needs.
Analyst: Joseph Coletti
Fiscal and Health Policy Analyst
919/828.3876 • jcoletti-at-johnlocke.org
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