Tax Subsidies for Expanding Health Insurance Coverage: Selected Policy Issues for the 108th Congress

Publication Date: August 2003

Publisher: Library of Congress. Congressional Research Service

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Research Area: Health

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Abstract:

An issue of continuing concern to Congress is the number of Americans who lack health insurance coverage. In 2001, an estimated 41.2 million Americans were uninsured for the entire year, 99% of whom were under age 65. The number of nonelderly uninsured rose each year from 1987 to 1998 and then declined in both 1999 and 2000, before increasing again in 2001.

In response to the increase in the uninsured population, policymakers at the state and federal levels of government have been searching for effective, affordable, and politically feasible ways to expand access to health insurance coverage. While a variety of proposed solutions have been examined and debated, recent Congresses have shown a growing interest in tax-based approaches. In the 107th Congress, the Trade Act of 2002 established a refundable and advanceable tax credit for the purchase of qualified health insurance by individuals who lose their jobs because of foreign trade. A number of proposals to create tax subsidies for the expansion of health insurance coverage have surfaced in the 108th Congress, including measures to create two new tax-preferred health savings accounts (H.R. 2596 as incorporated into H.R. 1) and tax credits for small employers that provide health insurance coverage for eligible employees (H.R. 450, S. 10, S. 53, S. 86, and S. 414).

This report summarizes what is known abut the factors shaping the costeffectiveness of tax subsidies for expanding health insurance coverage. In doing so, it reviews the principal findings of recent studies assessing the cost-effectiveness of a variety of proposed subsidies, many of which have been considered in recent Congresses. The report will be updated or revised to reflect important legislative activity, or to incorporate significant new research findings on the use of tax policy to improve health insurance coverage.

Tax policy can influence the demand for health insurance by altering its after-tax cost and terms of coverage. If the principal aim of policymakers is to expand health insurance coverage at a politically acceptable cost through the use of new tax subsidies, then certain factors would be critical in designing such subsidies. One is the type of subsidy being offered. Tax deductions are more valuable to individuals in higher tax brackets than those in lower tax brackets, but the vast majority of uninsured households fall in the lower brackets. Moreover, non-refundable tax credits for the purchase of health insurance may have little impact because nearly half of uninsured households have no federal income tax liability. Another factor to consider is who would be eligible for the tax subsidy. The cost per newly insured appears to depend critically on how narrowly a subsidy is targeted. Likely targets include low-wage firms, low-income workers whose employers do not offer health insurance, and all individuals who are ineligible for public or employer-provided insurance. Other important factors shaping the efficacy of proposed tax incentives to expand health insurance coverage include the type of health insurance policies eligible for the incentives, the shares of individual and family premiums they cover, and their ultimate policy objectives.