A number of legislative proposals on Capitol Hill would provide uninsured workers with a tax credit to help them purchase health insurance. The most recent was introduced on March 14 by Senators John Breaux (D-LA) and James Jeffords (R-VT). President Bush has proposed a similar credit. Such proposals have prompted some to argue that a better way to increase the rate of insurance would be to subsidize employers. Supporters of this view maintain that employment-sponsored health plans are popular and practical, and that subsidizing employers rather than families would therefore be a better way to cover uninsured families.
This view, however, fails to recognize the inherent limitation of traditional employer-sponsored insurance. While it usually does make sense for large, sophisticated employers to sponsor insurance--in other words, to arrange coverage--it is administratively costly and inefficient for small employers to try to sponsor health plans. Small firms also can rarely offer plan choices to their employees and tailor coverage to worker needs. Subsidizing these small employers would not overcome these drawbacks.
What is needed is a variant of employment-based coverage for certain groups of workers, especially employees of small firms among whom the rate of uninsurance is particularly high. Crafting such a variant requires lawmakers to recognize that:
- Congress can protect traditional employer-sponsored coverage.
The obstacles to employment-based coverage in the small-business sector help to explain the high level of uninsurance among families with workers in that sector. According to a recent Kaiser Foundation survey, 74 percent of the uninsured are in families with at least one full-time worker; while 99 percent of large firms offer insurance, only 55 of firms with fewer than 10 employees do so; and among low-wage workers (those who earned less than $7 an hour in 1996), 45 percent are not even offered insurance.
The limitations of small firms as sponsors of insurance reveal the weakness of proposals that would subsidize to cover the uninsured. Credits or other subsidies for employers do not make small firms good risk pools. Even though a subsidy would help to offset the high administrative costs borne by small employers, it would not make administration more efficient or sophisticated. Nor would a subsidy deal with the "hassle factor" that causes so many small-business owners to compete for workers by giving cash instead of complex benefits.
Tax credits for employers--in contrast to tax credits for employees--are also very difficult to target efficiently. If the government wishes to help lower-income families to afford insurance, it can use eligibility criteria based on family income; but if it tries to do this by means of a credit for employers, there is the problem of assuring that the subsidy supports coverage only for those who really need assistance.
Simply providing a subsidy to all small businesses would not do this, since the taxpayer would end up subsidizing the coverage of many well-paid lawyers, doctors, computer engineers, and others who work for small firms. Yet trying to limit subsidies to the costs of covering lower-income households would require employers to determine the household income of their employees, which would be a burden and also would raise issues of privacy and potential fraud.
Individual tax credits would allow the employment-based system to evolve in a way that would better meet the needs of working families. They also would allow traditional employer-sponsored insurance to continue for most workers and even make it available to additional families. But a system of credits for families also would encourage the simultaneous development of a slightly different system, primarily for uninsured workers in small firms.
Proposals for individual tax credits for health coverage, such as those advanced by President Bush and bipartisan groups of lawmakers on Capitol Hill, would help remove the barriers to alternative insurance arrangements and make new forms of coverage--including plans offered through churches, large corporations, and the FEHBP--available to working Americans. For this to occur, however, Congress must recognize the important distinction between the place of employment as the convenient place to obtain insurance and making tax relief to families contingent upon employer sponsorship of their health insurance.
Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.