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218 IRET Congressional Advisory 1 (2007)

handle is hein.taxfoundation/iretcgadv0215 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. January 25, 2007 Advisory No. 218 PRESIDENT'S HEALTH INITIATIVE CURES MANY ILLS President Bush has proposed a new tax treatment for health insurance. It would improve tax policy and would partially address several major concerns about health insurance coverage. The President's plan would help many taxpayers who cannot use the current tax incentives for purchasing health insurance. It would make insurance more affordable for people who do not have access to tax-favored employer-provided health insurance. The plan would tend to reduce the incentive in current law to over-consume health care among people below retirement age and not on Medicaid, and would thus somewhat reduce the demand-driven price pressure on medical costs. The plan would increase participation in and the efficiency of the individual insurance market. On the negative side, the plan would involve some administrative complexity. Also, it would pre- empt some potential revenue that might have smoothed the way for tax reform. It cannot, and is not intended to, solve the problems created by the major medical entitlement programs. The President's proposal Under the President's proposal, all working families who buy health insurance that meets certain basic coverage requirements would receive a tax deduction of $15,000 against the first dollars of wage, salary, or self-employment income. Single individuals would get a deduction of $7,500. Unlike an ordinary income tax deduction, the first $15,000 (or $7,500) of earnings would be free from both the income tax and the payroll tax. Most taxpayers would save money on both taxes. The plan would benefit workers via payroll tax relief even if they have no income tax liability. In exchange, the plan would eliminate the exclusion of employer-provided health insurance from tax. These now-excluded amounts would be added to taxable income. About 80 percent of working-age taxpayers who are insured through their employers would see a reduction in taxable income and tax liability, making the cost of insurance cheaper. About 20 percent of working-age taxpayers who have very generous employer-provided plans costing more than $15,000 or $7,500 a year would face an increase in taxable income and an increase in tax liability. For people who work at jobs that do not provide health insurance, the income tax and payroll tax deductions would give them more after-tax income to buy health insurance on their own. The deductible amounts would be adjusted annually for inflation using the consumer price index. A second portion of the plan would reallocate some federal money to states that help the poor and g~,3 * m ii. a ~

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