Progressive Case to Eliminate Health Insurance Tax Credit

Although it has been mostly promoted in the political sphere by right wing free market fundamentalists as part of their proposals to throw everybody into an individual insurance market (a horrible idea), and by some in congress in disingenuous plans (Wyden-Bennett) to save the federal budget part of health care costs (but increasing total costs and costs to both individuals and states; thanks a lot), there is a progressive policy wonk case to be made for changing/ending the health insurance tax credit for employer-based health insurance.  


But only if it replaced by something truly better.


And of course, that same case then leads one to single payer national health insurance paid for preferably by a progressive income tax.



The history of the employer-provided health insurance tax credit is of course tied to the history of employer-based health insurance. When wage-price controls were implemented during World War II, the only recently New Deal empowered Unions were unable to bargain for increased wages. So they negotiated for benefits, notably health insurance. This was the first time that there had been ANY significant amount of health insurance in the United States. Previously, for almost everyone, you either paid out of pocket, used charity care, or had no health care.  That unique history is why we have our uniquely bad only-in America system of tying having health insurance to your employer.  It is also why for many unions it is an understandable sacred cow. They fought for it.


As Robert Reich points out:



It is also, in effect, the government-backed health-insurance system we now have. Employer-provided health insurance covers three-fifths of the American population under 65. Seventy percent of the 253 million Americans with health insurance receive at least some of it through their employers.


Which is exactly the problem. Most middle-class American families rely on it and won't want to give it up even if a new universal system becomes available. Organized labor rightly considers these benefits among the union movement's proudest achievements.


Remember, regardless of whether you are unionized or not, if you have health insurance through your employment, the only reason you have it is becuase unions fought for it, and because it is partially subsidized by this tax credit.


But, this system is also why GM became, in effect, an insurance scheme that paid for it by making cars.


But as a matter of economics and policy the tax credit has bad side effects and is also highly regressive, as the leading health economist (and generally counted as a progressive) Uwe Reinhardt of Princeton explains:



First, the price reduction drives up the demand for the subsidized commodity — for example, for generous health insurance packages. It becomes one of several cost drivers in health care.


Second, and much more problematic, in dollar terms the price reduction is larger for high-income employees in high marginal tax brackets than for lower-income workers.


In other words, the benefits of such "tax expenditures" (as the tax-revenue loss triggered by tax-deductibility is called) accrue disproportionately to higher-income groups. Very low-wage workers hardly benefit at all from the tax exclusion. Their bosses benefit handsomely. It can be asked why lawmakers favor this distributional effect.


The regressive nature of the system is multi-fold:



  1. If you are poor, have no insurance, or get your insurance as Medicaid, Medicare, VA, DOD, etc, then get no benefit.


  1. If you are self-employed and paying for your own insurance, you are not allowed to take this deduction; you get no benefit. You pay for your own insurance out of after-tax dollars.


  1. If your are getting health insurance as part of a group plan through your employer, but your plan is cheap because you are a low level employee (aka: 90% of workers, not senior management), then your benefit is small.


  1. If you are management, giving yourself a Cadillac health plan, then you also get a much greater tax credit.


  1. If you are the business, you are getting a great tax credit.

As Robert Reich puts it:



It's also an upside-down system. The biggest share of the $246 billion goes to upper-income people. The lower your pay, the less coverage you're likely to have. Workers in the lowest-paying jobs don't generally get any health insurance from their employers. Few people collecting $12 an hour at fast-food restaurants or big-box retailers see any part of the $246 billion. The higher your pay, the more health coverage you receive, and the bigger chunk of the $246 billion you get. Top executives and their families get gold-plated plans guaranteeing top-notch medical attention for just about every risk imaginable, along with extra coverage in retirement.


In fact, most economists are pretty convinced that workers lose in the long run when wages are traded away for benefits:



Most economists are persuaded by theory and evidence that, over the longer run, the contributions employers make toward the fringe benefits of their employees come out of the employees’ take-home pay. Economists think of employers as pickpockets, so to speak, who take a chunk of the employee’s total compensation and buy with it whatever fringe benefits they "give" their employees. That process blinds employees to the inroads that their health care makes into their families’ livelihood.


Over the long haul, employers may buy 60 cents of benefits instead of paying the workers a dollar more.


Nevertheless, it is claimed that:



Unions, along with left-of-center politicians and policy experts, have defended the tax preference in spite of its regressive nature, in the belief that its abolition would erode employer-sponsored health insurance and in that way eliminate the only larger risk pools that exist outside government-sponsored insurance.


Yes, well that is the point isn't? The whole point of insurance is to spread the risk. The most rationale and humane pool would be all of US (get it: all of us = U.S.? get it? get it? sorry ;) ).  


Employer-based coverage, and its regressive offspring the tax credit makes no policy sense. They are not worth saving... but only if the replacement really is better. That would be single payer.


Amusingly, at the Senate Finance Committee roundtables that single payer folks were kept from, the only mention of single payer was in response to the proposal from Baucus to consider some form of change in the employer health insurance tax credit.  A labor representative smartly pointed out that if something that radical (and destructive of the current employer-based system) were proposed, then why not do the right thing and go for single payer?


It would make some sense to cap the credit (and/or tax the benefit above some threshold), to not be subsidizing Cadillac plan for the wealthy.


It would make more sense to indeed get rid of that regressive tax credit, untie health insurance from employment, and go to single payer.


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There are more Single Payer public actions being held in June. Find yours here.

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