e-Texas e-Texassmaller smarter faster governmentDecember, 2000
Carole Keeton Rylander
Texas Comptroller of Public Accounts

Recommendations of the Texas Comptroller

Chapter 8: Health and Human Services

Encourage Federal Tax Credits

for Individuals Buying Private

Health Insurance


Employees who receive employer-paid health insurance also receive federal tax breaks, because employment-based health insurance is fully deductible from federal individual income taxes. In addition, certain employers can fully deduct it as a business expense from corporate income taxes. Persons who purchase private health insurance receive no such tax breaks. The federal government should rectify this inequity by providing tax relief for private health insurance purchasers.


Almost 90 percent of all health insurance is paid for by and/or through employer programs. Because employer-provided health insurance is not taxed, employees, in effect, can buy considerably more insurance with the same dollar than persons who must buy private insurance with taxable dollars.

The federal tax code gives generous tax breaks to employees who obtain employer-sponsored health insurance, as well as to employers, who can fully deduct it as a business expense from corporate income taxes. However, no tax break is given to those who buy private insurance policies.[1] For them, a dollar in pretax wages may buy only 50 cents’ worth of health insurance after federal, state, and local taxes are taken out.

For years, Congress has been aware of this issue. Under the Omnibus Appropriations Act for fiscal 1999, self-employed people receive a 60 percent deduction for their insurance expenses, which is scheduled to rise to 100 percent by 2003.[2] Some members of Congress would like to accelerate that schedule so that the self-employed receive a full deduction immediately. In addition, some would like to expand the deduction to include anyone who purchases health insurance individually, not just the self-employed.

Tax credits, however, provide a more substantial tax break than deductions. While a tax deduction is subtracted from a person’s income when calculating taxes, a tax credit is subtracted from the person’s bottom line of taxes owed.

For example, under a recent proposal by US Representative Dick Armey (R-Texas), all uninsured families would receive a maximum up to $3,000 tax credit for the purchase of health insurance.[3] If an insured family owes $5,000 in income taxes, it would have to pay only $2,000, as long as the remainder is spent on health insurance. In many parts of the country, families can purchase basic health insurance (with a deductible, for example, of $600 or more) for $3,000 annually.[4] For families who make too little income to have a tax liability, the tax credit would be available as a refund, as is the case with the earned income tax credit.

Representative Armey’s tax credit proposal is only one of several being discussed in Congress. Proponents of tax credits say they could give consumers more choice in health plans, since they would no longer be limited to insurance offered by employers. In addition, consumers who buy their own private health insurance can keep their coverage even if they change jobs, without any lapse in coverage.


A state resolution encouraging the US Congress to change federal law to provide tax credits to those who purchase their health insurance independently of employers should be enacted.

Fiscal Impact

Savings to state and local governments from this proposal cannot be estimated. A loss in federal revenue could result from this recommendation, but the amount cannot be determined at this time.

[1 ] Heritage Foundation, A Guide to Tax Credits for the Uninsured, Backgrounder No. 1365, by James Frogue (Washington, DC, May 5, 2000), p. 8.

[2 ] Subtitle A. U.S.C.§162 (I)(l).

[3 ] US Congress, House, A Bill to Amend the Internal Revenue Code of 1986 to Allow Individuals a Refundable Credit Against Income Tax for the Purchase of Private Health Insurance, 1999, H.R. 2362. The credit is available to uninsured Americans (specifically, all persons who do not participate in a tax-subsidized employer health plan or Medicaid; do not receive VA or Indian health benefits; are not eligible for Medicare; are not in prison; and live in the United States for at least half of the year).

[4 ] Heritage Foundation, A Guide to Tax Credits for the Uninsured, p. 23.

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

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