March 19, 2001

March 19, 2001 | News Releases on Health Care

Give Health Insurance Tax Credits Directly to Employees, Study Says

WASHINGTON, Mar. 19, 2001-If federal lawmakers want to reduce the number of Americans without health insurance-estimated at about 42 million-they should offer tax credits directly to individuals, which would let people buy the coverage that best suits their specific needs, a new Heritage Foundation paper says.

Some lawmakers have suggested giving tax credits to employers instead. But this approach doesn't address the problems that prevent many employers from sponsoring health plans in the first place, says Heritage Vice President Stuart Butler.

Giving credits to employers wouldn't eliminate the "hassle factor" that comes from attempting to pick a plan that fits the needs of all their employees, he says. And it wouldn't reduce the high costs small-business owners face because they can't "pool" insurance risks to negotiate lower premiums the way large-business owners can.

Another problem, he says, would be deciding how to administer the credits and, in particular, how to make sure the credits subsidize only the insurance of needy workers. If the government simply provides a subsidy to small businesses, it ends up subsidizing the insurance of highly paid workers such as doctors, lawyers and computer engineers who work for small firms. If it puts income restrictions on the credits, employers would have to get full income information on their workers and others in their households-a requirement that raises privacy concerns, invites fraud and places an undue burden on employers.

No such problems arise if tax credits go to individuals, Butler says.

"For convenience's sake, the credits could be provided through employers but without the employer having to arrange the insurance," he says. "Employers are not necessarily the best sponsors of coverage."

Butler compares his proposal to the withholding system for income and payroll taxes. Employers withhold taxes from employees' paychecks and send the money to the government. But employers don't design the tax code or "sponsor" the tax system in any way. They serve merely as a clearinghouse for tax payments. Employers could do likewise with health insurance by using tax credits to pay the premiums on plans selected by their employees.

"Smaller employers could handle the mechanical aspects of arranging for payroll deductions and premium payments without having to sponsor a plan," Butler says. "With individual credits, eligible employees could join any plan available in their area, not just the one sponsored by their employer. And with the credit not restricted to employer-sponsored coverage, eligible workers could enjoy a wide variety of plans."

This reform could open the door to coverage offered through churches, unions, professional and trade organizations, large corporations and even the highly regarded Federal Employees Health Benefits Plan used by members of Congress, their staffs and other federal workers. It also could lead to a variety of new options for those seeking insurance. Large companies such as General Motors and John Deere, which commonly take products developed as internal services and offer them to the public, could open up their huge health plans to non-employees.

"Something has to be done soon," Butler says. "With the number of uninsured likely to keep growing, the costs of doing nothing are substantial and mounting."

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