October 19, 2006
The growth of the uninsured is a national, state and local challenge. At the root of many of our health care problems is a tax code that skews our health care decisions.
A fundamental rule of economics holds that when you tax something you get less of it, and when you subsidize something you get more of it. In other words, incentives matter. We seem to have forgotten that principle in health care.
Today, an employer can purchase insurance for an employee with pre-tax money. However, if health insurance is not available through their employer, the individual must pay for health insurance with after-tax money. In many cases, the combined impact of payroll taxes, federal income taxes and state income taxes can nearly double the cost of insurance. For example, a typical employee in the 25 percent federal tax bracket must earn $4,133 to afford the same health insurance an employer would purchase for $2,232. It’s not surprising that many individuals simply go without coverage due to cost.
The tax code has also encouraged over-emphasis on insurance. Insurance is meant to cover unexpected, catastrophic events – a house fire, an automobile accident or a major illness. But because for so many years insurance has been tax deductible, and out-of-pocket expenditures have not, we have seen a dramatic shift in how we pay for health care. We have gone from spending 85% of our health care dollars out-of-pocket to only 15%.
Up until 2003, if an individual chose a catastrophic policy, he or she paid for out-of-pocket expenses with after tax money. With the newly authorized Health Savings Accounts, a portion of the tax inequity has been eliminated. But far more needs to be done.
The first step is to eliminate or at least reduce taxes on health insurance. That includes state and local premium taxes, state income taxes, federal income taxes and payroll taxes on individually purchased health insurance policies. This would lower the cost of insurance and provide tax equity to employees who purchase insurance on their own.
For example, Georgia’s premium tax is one of the highest in the nation. The state portion for health insurers ranges from 0.5 to 2.25 percent. According to Bob Moffitt, a health care expert for the Heritage Foundation, “There is a positive relationship between increased health care costs, and an increase in the numbers of the uninsured nationwide. According to Congressional Budget Office, every 1 percent increase in health insurance costs causes roughly 200,000 Americans to lose coverage. Independent estimates put the figure even higher. According to the Lewin Group, a prominent private sector econometrics firm that measures the economic impact of health policy changes, every 1 percent increase in premiums causes roughly 300,000 Americans nationwide to lose coverage.”
If government budget constraints are too tight, these tax measures could certainly be confined to high-deductible insurance linked to Health Savings Accounts. This not only would emphasize true insurance, but would provide a vehicle for individuals to make their out-of-pocket expenses tax deductible.
Critics argue that it is bad policy to encourage high-deductible insurance over traditional coverage. But research shows that individuals with insurance are healthier and less likely to end up with an expensive complication in the first place. If you are uninsured, isn’t high-deductible health insurance better than no insurance at all? Having grown up in a small town, I frequently saw the community come together to support a local family when misfortune struck. Pickle jars with handwritten labels appeared near cash registers at local stores and quickly filled with donations. Such community action can easily cover a $1,000 deductible for a liver transplant, but isn’t a realistic option when finding $250,000 for the entire operation.
If our policy goal is to encourage health insurance coverage, why should we tax it?
This tax reform is something you can do now, it is focused on reducing the cost of health insurance, it is focused on individuals, it encourages tax equity, it promotes portable insurance and it should lower the cost of uncompensated care by reducing the number of uninsured in Georgia.