Chapter 8: Health and Human Services
Encourage Federal Tax Credits
for Individuals Buying Private
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
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. 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. 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
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.
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. 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
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.
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.
[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.