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House Committee Examines Health Tax Credits

On February 13, the House Ways and Means Committee held a hearing to examine the President’s FY 2003 budget proposal that would provide $89 billion for the purchase of private health insurance by people who are not covered through their employer.

Under the President’s plan, families with two or more children and an annual income of less than $25,000 would be eligible to receive up to $3,000 in refundable tax credits to cover up to 90 percent of health insurance costs. Individuals would be eligible for a tax credit of up to $1,000. The credit would be reduced once a family’s income reached $25,000 and phased-out at $60,000. For individuals, the credit would be reduced from 90 percent to 50 percent between $15,000 and $20,000 of adjusted gross income and phased-out when an individual’s income reached $30,000.

The credit would be available to anyone under age 65 who does not have employer-provided insurance or is not eligible for publicly-funded health insurance. It would be refundable for people without tax liability. Eligible persons would be able to access the credit when they wanted to buy health insurance, rather than having to wait until they filed their income tax returns.

The committee also revisited a proposal to provide a 60 percent credit for the purchase of private health insurance policies for workers who have been laid off. The measure was included in the economic stimulus package (H.R. 3529) that passed the House on December 20, 2001 (see The Source, 12/20/01) and the stimulus bill (H.R. 622) that passed the House this week (see The Source, 2/15/02). According to the committee, “Individuals would have the choice to stay in their employer-sponsored COBRA policy or to purchase a policy in the individual market.” The President’s FY2003 budget would provide “a $1,000 credit for individuals and up to $3,000 for families” for the purchase of private health insurance policies.

“More than one million people have lost their jobs since September 11,” stated Committee Chair Bill Thomas (R-CA). The health tax credits that are a focus of this hearing would provide “availability, affordability, and consumer choice,” he said, pointing out that “the tax credits are refundable and allow individuals to make choices to fit their family’s needs.” He added, “This hearing will help lay the groundwork for insuring all Americans.”

In his opening remarks, Rep. Pete Stark (D-CA) expressed concern “that this hearing focuses, not on helping the uninsured get health insurance, but rather on providing tax credits that create more problems than they solve.” He contended the health care tax credits could undermine employer-provided health plans, and that $3,000 in coverage was inadequate. “The average policy is about $6,000,” he said. For a family with an income of $25,000, “a tax credit of $3,000 does not make a $6,000 policy affordable,” he added.

Rep. Gerald Kleczka (D-WI) agreed. “This plan is better for employers,” he said. “It sounds the death-knell for employer-provided health insurance.”

Rep. Thomas responded, “This is a modest attempt to correct a flawed system; the flaw is that employer-provided insurance doesn’t cover everyone.”

Several Members of the committee expressed concerns about the cost of the tax credits. Rep. Nancy Johnson (R-CT) reminded everyone that “this committee provides $118 billion for employer-provided health insurance,” and added, “everyone ought to have access to the current subsidy that we provide.” She called the displaced worker tax credit “a powerful assist to the unemployed and the uninsured.”

The witnesses at the hearing gave the tax credits mixed reviews. Max McClellan of the Council of Economic Advisers told the committee, “Recent research suggests that the credit would provide good, affordable health insurance options for the vast majority of individuals who are eligible for the credit.” He stated that the President’s tax credit plan “will allow 6 million” of the nearly 40 million Americans “who would otherwise be uninsured during a year to gain coverage,” and would have a “negligible impact” on employer-provided health coverage.

Iris Lav of the Center on Budget and Policy Priorities disagreed, calling the tax credit “a threat to the employer-based health care system.” She cited research by Jonathan Gruber of the Massachusetts Institute of Technology that shows, “the Administration’s proposal would draw four million people out of employer-provided insurance.” According to Mr. Gruber, “only 3.3 million people would have been previously uninsured; more than two-thirds of tax recipients would have already had insurance.” Mr. Gruber also estimated that 1.4 million people would lose health coverage because their employers would no longer offer health insurance, and “the net reduction of uninsured ends up being only 1.9 million.”

Ms. Lav recommended, “A far better alternative to address the problem of the uninsured would be to provide states additional federal SCHIP funds to expand coverage to parents of children eligible for public programs.”

Jeff Lemieux of the Progressive Policy Institute told the committee, “The biggest flaw in the Administration’s proposal is that it does not allow people who could get health coverage at work to receive tax credits, even if their incomes are very low. That is unfair, since low-income people who can’t afford coverage at work would get nothing.”

Representing the private sector, Vip Patel of eHealthInsurance, Inc. said that, while the tax credit may not be the answer for all of the uninsured, it “will allow a large segment of the uninsured to put the cost of a private health insurance policy within easier reach.” He added, “If we turn away ideas because they won’t solve the problem in its entirety, there is a strong chance no one will be helped.”

Stuart Butler of the Heritage Foundation agreed. “A federal tax credit should be considered a foundation upon which other financing bricks are added. Put another way, a $3,000 federal credit puts the family $3,000 closer to obtaining affordable coverage.”

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