First, Do No Harm: Designing Tax Incentives for Health Insurance

Leonard E. Burman, Amelia Gruber

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INTRODUCTION

As part of his 2001 Budget, President Bush proposed a refundable tax credit in an effort to help the nearly 18 percent of nonelderly Americans who lack health insurance coverage. His goal of expanding access to insurance enjoys bipartisan support. Members of both parties have advanced proposals including health insurance tax credits or deductions.

A government commitment to expanding coverage is a positive development. More than 40 million nonelderly Americans—the overwhelming majority of them in working families—are uninsured. They are less likely to obtain important preventive screenings while healthy and receive lower quality care when they get sick. Furthermore, the public ultimately shoulders the burden of paying for the medical treatment of those lacking insurance, either through higher taxes or higher health care costs.

The President’s plan may help some of those who currently lack health insurance. But his proposed commitment of about eight billion dollars per year in tax subsidies, starting in 2005, may also trigger unintended consequences. The vast majority of working-age Americans currently obtains health insurance coverage through an employer. Yet, the Administration’s tax subsidy initiative would only be available to those without employer-sponsored insurance (ESI), effectively penalizing ESI recipients. Any policy undermining ESI might cause many workers, especially those at small firms, to lose their insurance coverage.

Our paper summarizes the latest descriptive data on health insurance coverage for the nonelderly, discusses the economic arguments for health insurance subsidies, and details the advantages and disadvantages of subsidizing ESI. We outline a private, market-based option that combines voluntary health insurance market reforms and public incentives for individuals to obtain either high quality nongroup insurance or ESI. We also develop a simple model illustrating how various subsidy schemes affect the status quo and demonstrate that the President’s proposal for non-ESI tax credits is equivalent to a nondiscriminatory subsidy scheme, financed partly by a tax on ESI. For that reason, it runs the risk of doing harm—that is, undermining the kind of insurance that currently covers most nonelderly Americans.

We are grateful to Cori Uccello for extensive advice and technical assistance, and to Linda Bilheimer, Linda Blumberg, Sonia Conly, Judy Feder, Gillian Hunter, and Eric Toder for very helpful comments on an earlier draft. Views expressed are solely those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

JEL Codes: H24, H31, I11

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