Tax Credits for Health Insurance

U.S. Const. Art. I, Sec. 8, cl. 1, “to lay and collect taxes…and provide for the…general welfare of the United States.”

“Barack Obama and Joe Biden's Plans for Small Business,” Obama-Biden Campaign, available at <http://www.barackobama.com/pdf/SmallBusinessFINAL.pdf> (last visited June 16, 2009).

I.R.C. § 105(a); I.R.C. § 106(a).

I.R.C. § 223(a).

I.R.C. § 106(d)(1).

I.R.C. § 106(d)(2).

I.R.C. § 106(a).

I.R.C. § 105(b).

Notice 2002–45, 2002–2 C.B. 93, § V.

I.R.C. § 162(1).

I.R.C. § 213(a).

I.R.C. § 213(a).

I.R.C. § 162(1)(2)(B).

Bitter B. Lokken L. , Federal Taxation of Income, Estates and Gifts, 3rd ed. (New York: Research Institute of America, 2008): At 36.2.

For the treatment in payroll taxes in the context of various health care tax provisions, see IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, available at <http://www.irs.gov/pub/irs-pdf/p15b.pdf> (value of employer-provided health insurance and contributions not subject to payroll taxes) (last visited June 16, 2009); U.S. Treasury, “Health Savings Accounts,” available at <http://www.ustreas.gov/offices/public-affairs/hsa/>(whether HAS contributions subject to payroll taxes depends on whether contribution is through an employer-sponsored health plan and is subject to certain dollar limits) (last visited June 16, 2009); IRS Publication 535, available at <http://www.irs.gov/publications/p535/ch06.html#d0e3753> (self-employment payroll taxes must be paid on amounts deducted by the self-employed to purchase health insurance) (last visited June 16, 2009). The small business community has expressed concern about this distinction for the self-employed. See, for example, National Association for the Self-Employed, Self-Employment Tax on Health Insurance Premiums, available at <http://www.advocacy.nase.org/issue_briefs/taxonhealthpremiums.asp>.

The deduction for insurance costs for the self-employed is not an itemized deduction, so is not subject to a percent floor or the phase-out for itemized deductions.

I.R.C. § 7702B(a)(1).

I.R.C. § 7702B(a)(2).

I.R.C. §125(f).

I.R.C. § 106(c).

I.R.C. § 501(c)(9).

See Bittker Lokken , supra note 14, at 63.14.

I.R.C. § 35.

Joint Committee on Taxation, Tax Expenditures for Health Care; (JCX-66-08), July 30, 2008.

Id.

Internal Revenue Service, “HCTC: The Monthly HCTC,” available at <http://www.irs.gov/individuals/article/0,id=109941,00.html> (last June 16, 2009).

Internal Revenue Service, “HCTC: The Yearly HCTC,” available at <http://www.irs.gov/individuals/article/0,id=109954,00.html> (last visited June 16, 2009).

I.R.C. § 4980B.

IRC §§ 9801–9833.

U.S. Census Bureau, Income, Poverty and Health Insurance Coverage in the United States 2007, available at <http://www.census.gov/prod/2008pubs/p60-235.pdf> (last visited June 16, 2009).

Joint Committee on Taxation, Tax Expenditures for Health Care (JCX-66-08), July 30, 2008.

U.S. Census Bureau, Income, Poverty, and Health Insurance Coverage in the United States: 2007, available at <http://www.census.gov/prod/2008pubs/p60-235.pdf> (last visited June 16, 2009).

While the exclusion for employer-provided insurance is generally regressive, this analysis is complicated in two respects. The first relates to the Earned Income Tax Credit (EITC). It turns out that certain low income taxpayers actually benefit from reporting increased taxable income because any costs are more than offset by the increase in EITC benefits. In contrast, because increases in income can result in reduced EITC benefits, taxpayers in the EITC phase-out range can be faced with relatively high marginal rates. Second, because employer-provided health insurance is properly treated as earned income, its inclusion would also have payroll tax implications.

In light of the Obama Administration's proposal to allow the Bush tax cuts expire in 2010, it is worth noting the interaction of marginal tax rates and the value of tax deductions. If the top marginal rates rise to 38.5 percent, the value of the exclusion for health insurance will increase from $3,500 to $3,850. This illustrates notable paradox: while increasing marginal rates increases the value of “tax expenditures” benefiting upper income taxpayers, it does so in the context of increasing their overall tax burden. Stated differently, a first dollar, comprehensive flat rate tax would equalize the value personal deductions and exclusions.

Goodman J. C. , “McCain Is the Radical on Health Reform,” Wall Street Journal, July 30, 2008.

Burman L. E. , “Tax Incentives for Health Insurance,” Tax Policy Center 20 (2003).

Butler Stuart Cf. , “Evolving Beyond Traditional Employer-Sponsored Health Insurance,” Discussion Paper 2007–06, Hamilton Project, May 2007, available at <http://www.brookings.edu/es/hamilton/200705Butler.pdf> (last visited June 16, 2009); Huang C.-C. Shaw H. , “New Analysis Shows ‘Tax Expenditures’ Overall are Costly and Regressive,” Center on Budget and Policy Priorities, February 23, 2009, available at <http://www.cbpp.org/files/2-23-09tax2.pdf> (last visited June 16, 2009); Owcharenko N. , “Health Care Tax Credits: Designing an Alternative to Employer-Based Coverage,” Backgrounder #1895, Heritage Foundation (November 8, 2005), available at <http://www.heritage.org/Research/HealthCare/bg1895.cfm> (last visited June 16, 2009).

Congress and the Obama Administration expanded greatly the scope of refundable credits in the recently enacted “stimulus” legislation by providing for advance refundable energy tax credits. As noted below, this approach is instructive in the health insurance context.

See Batchelder L. L. Goldberg F. T. , and Orszag P. R. , “Efficiency and Tax Incentives: The Case for Refundable Tax Credits,” Stanford Law Review 59 (2006): 23. See also Jenn B. H. , “The Case for Tax Credits,” Tax Lawyer 61 (2008): 549, at 561; Weiss D. M. , “Tax Incentives without Inequity,” UCLA Law Review 41 (1994): 1949.

Surrey S. S. , Pathways to Tax Reform: The Concept of Tax Expenditures 136 (1974).

The Lewin Group, McCain and Obama Health Care Policies: Cost and Coverage Compared 13 (2008).

Id.

Id.

Kaiser Family Foundation, Health Care Costs and Election 2007, available at <http://www.kff.org/insurance/h08_7828.cfm> (last visited November 20, 2008).

Id.

Office of Mgmt. and Budget, Executive Office of the President, A New Era of Responsibility: Renewing America's Promise, 2009.

Id., at 11–12. (“Overall, health care is consuming an ever-increasing amount of our Nation's resources…The bottom line is that the current path of rising health care costs is unsustainable, not only for the Federal Budget but also for family budgets.”)

There are, of course, numerous other actual and perceived contributing factors. For example, the recent “stimulus legislation” justified providing $19 billion to facilitate transition to electronic medical records both because it would increase quality and because it would generate substantial cost savings. See Ratnayake H. , “With Stimulus Help, Physicians Get Wired,” News Journal, February 22, 2009. Along these same lines, the Obama Administration budget proposes to control costs through a variety of measures, including increasing access to generic drugs and reducing hospital readmission rates. See Office of Mgmt. and Budget, supra note 46. In contrast, some observers attribute escalating costs to out-of-control malpractice suits or marketing by drug companies.

Furman J. , “Health Reform through Tax Reform: A Primer,” Health Affairs 27 (2008): 622, at 623.

Id., at 624.

The federal program once known as “food stamps” now goes by the name “Simplified Nutritional Assistance Program” (SNAP). Some of the states have also adopted different terminology. For convenience, this paper will refer to this subsidy as “food stamps.”

Tax returns do gather information that may be a surrogate for home ownership and investment assets (mortgage interest and property tax deductions; interest, dividends, capital gains and other forms of investment income). It is likely, however, that this information is far too inexact to provide a reliable asset-based measure for eligibility.

The Massachusetts Health Insurance Connector Authority, Medical Benefit Request Form, 2008.

Health Connector, “About Us: Connector Programs,” available at <http://www.mahealthconnector.org/portal/site/connector/> (follow “Commonwealth Care” hyperlink; then follow “eligible” hyperlink) (last visited June 16, 2009).

Massachusetts Department of Revenue, Individual Mandate Penalties for Tax Year 2008, 2008.

See Internal Revenue Service, supra note 26.

Health Coverage Tax Credit: Simplified and More Timely Enrollment Process Could Increase Participation, GA0-04-1029.

The Massachusetts Health Insurance Connector Authority, supra note 54, at 15.

Between June 2007 and June 2008, 4,309,000 births occurred in the U.S., as did 2,437,000 deaths and 2,153,000 marriages. During that same period, 3.5 divorces occurred per every 1,000 people in reporting states. See Tejada-Vera B. Sutton P. D. , National Center for Health Statistics, “Births, Marriages, Divorces, and Deaths: Provisional Data for April 2008,” National Vital Statistics Reports, 57 no. 9 (2009). Americans also change jobs and move frequently. The Department of Labor reports that the average person born in the later years of the baby boom held 10.8 jobs from age 18 to age 42. See Department of Labor, Number of Jobs Held, Labor Market Activity, and Earnings Growth among the Youngest Baby Boomers: Results from a Longitudinal Survey Summary, News Release, available at <http://www.bls.gov/news.release/nlsoy.nr0.htm> (last visited June 16, 2009). Similarly, the U.S. Census Bureau reports that the average American makes 11.7 moves in a lifetime. See Hansen K. , “Geographical Mobility,” U.S. Census Bureau, available at <http://www.census.gov/population/www/pop-profile/geomob.html> (last visited June 16, 2009).

See The Massachusetts Health Insurance Connector Authority, supra note 53, at 41–45.

See the “Legal Solutions in Health Reform” paper by Hall M. A. , “The Constitutionality of Mandates to Purchase Insurance,” Journal of Law, Medicine & Ethics, 37 no. 3, Supplement (2009): 38–50.

Indeed, this was one of the primary attacks leveled by Senator McCain against then-Seantor Obama's health care proposal – that he was proposing a mandate that would be enforced by the dreaded IRS.

Note that in the employer context, rather than having employees sign over the tentative credit amount, the employer could simply pay for coverage and treat that payment as wages. The employee would then claim his or her actual credit against his or her tax liability for the year. This arrangement would work well even where employees could elect among different types of coverage, with the employer making supplemental wage payments or reductions from cash compensation, depending on the particular coverage selected by the employee.

Under current law, the HCTC program involves third-party payment. If a recipient selects the “advance monthly” option, he or she pays 35 percent of monthly premiums to the federal government, which then pays the insurance company 100 percent of premium costs each month. Individuals may instead choose to pay for plans directly throughout the year and themselves receive the HCTC directly either as a tax refund or a credit against taxes owed. In addition, the proposed federal individual development account program would have employed such a structure. Similarly, individual development accounts, or “IDAs,” were “matched savings accounts” for low-income families. See Corporation for Enterprise Development, Expand Individual Development Accounts in the 110th Congress: The Savings for Working Families Act (S. 871 and H.R. 1514), available at <http://www.assetsconference.org/documents/hill_visits/SWFAonepager.pdf> (last visited June 16, 2009). IDA holders could set up savings accounts at qualified financial institutions. The funds in these accounts could go toward buying a first home, paying for post-secondary education or building a small business. Account holders would make payments into these accounts, and the financial institutions would match the payments on a dollar-for-dollar basis. Then, at the end of each year, the financial institutions could claim tax credits for the total amount of matching payments made plus a small bonus for participating in the program. See Savings for Working Families Act of 2007, 110th Cong., 1st Sess. (2007).

It could also take into account other factors, such as whether the taxpayer is disabled, or where the taxpayer lives if it were decided to also vary the credit to reflect different costs for health insurance in different parts of the country.

While these arrangements raise administrative complexities, it is important to note that they resemble a variety of provisions under current law, for example, contributory retirement plans, so-called cafeteria plans, MSs, HSAs, and VEBAs. Third parties have developed sophisticated and efficient administrative platforms to deal with these arrangements and could likely accommodate the refundable health insurance credit regime described above.

Hodge S. A. , “Number of Americans Paying Zero Federal Income Tax Grows to 43.4 Million,” Tax Foundation, March 30, 2006, available at <http://www.taxfoundation.org/research/show/1410.html> (last visited June 16, 2009).