Fixed Tax Credits

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Voluntary Health Reform >> Fixed Tax Credits


Basic Design

This proposal would replace the tax exclusion with fixed tax credits and make coverage more affordable by incentivizing states to create statewide health insurance exchanges OR establish mechanisms to make affordable coverage more available to individuals with high cost illnesses (e.g., high risk pools) and enable health insurance plans to offer at least one affordable health plan to individuals and families.

  • Eligibility: all U.S. taxpayers, taxpayer spouses and taxpayer dependents with qualified health insurance would receive a flat tax credit ($2,160 for individuals and $5,400 for families) that is refundable and advanceable to assist in paying for such coverage. Those on Medicare, Medicaid, SCHIP, or military coverage (VA or TRICARE) are not eligible. Only those covered through group health plans that currently qualify for the tax exclusion or who obtain non-group coverage in States certified as offering affordable coverage would qualify for a tax credit. Those obtaining coverage through a certified state Exchange must be residents of that State, citizens or legal aliens of the U.S. and not covered by group health insurance; those on Medicaid or SCHIP may obtain coverage from the Exchange.
  • Benefits: qualified health insurance is defined as any health insurance constituting medical care; having a reasonable annual or lifetime benefit maximum; and providing coverage for inpatient and outpatient care, emergency benefits, and physician care. In future years, tax credit amounts would be indexed to a blend of CPI and medical inflation. Each certified state Exchange would create a basic affordable benefit package whose average premium does not exceed 6 percent of the State’s median income. If market forces do not produce at least one such plan in every area of the state, state premium subsidies for those enrolling in the lowest cost plan (rather than price controls) must be used to achieve this objective; states may also provide additional premium assistance to low-income individuals.
  • Freedom of Choice: this proposal would broaden current federal tax subsidies for health insurance coverage to all private health insurance plans rather than just those offered through employers. Those purchasing coverage for less than the amount of the tax credit must deposit the funds in a tax-preferred health account, including HSAs, MSAs or newly established Health Insurance Reserve Accounts. Those purchasing coverage in excess of the tax credit amount would do so with after-tax dollars. States electing to create health insurance exchanges must provide a pathway for enrollment of Medicaid and SCHIP eligibles. Medicaid Health Opportunity Accounts, currently restricted to 10 states, would be extended to all states, thereby permitting states to offer HSA-style accounts to Medicaid eligibles.
  • Financing: the federal tax credits and federal infrastructure to certify whether states offer affordable coverage would be financed entirely through savings from eliminating the current tax exclusion for employer-provided health benefits. Each State would use any revenue source desired to finance whatever subsidies may be required to achieve affordable coverage through an Exchange or additional premium subsidies for low income individuals regardless of where they purchase coverage.
  • Regulation: those not previously having income tax liabilities would have to file tax returns to qualify for their credits.  The Secretary of the Treasury would establish a program for payment of health insurance costs by advancing health insurance tax credit amounts to insurance providers during the taxable year. The Secretary of Health and Human Services would designate which states have made sufficient efforts to give their citizens access to affordable coverage, thereby making their citizens eligible for tax credits. Such efforts can include (but are not limited to) a) the existence of an Exchange; or b) the existence of a high risk solution (e.g., high risk pool, reinsurance mechanism, or other state-designated high risk solution) and the availability of affordable coverage. The Secretary also would certify Exchanges based on a number of requirements regarding offering at least one affordable health plan, workable enrollment mechanisms, pathways for Medicaid/SCHIP enrollment, methods to reduce adverse selection, risk distribution mechanisms, dissemination of information to consumers and information reporting to the Secretary. Any insurance plan licensed by a state may participate in that State’s exchange, but states may not impose any new benefit requirements or price controls on plans participating within the Exchange; however states would be permitted to arrange multi-State pooling arrangements to make Exchange coverage more affordable.



  • Federal. The Trade Adjustment Assistance Reform Act of 2002 created a Health Coverage Tax Credit that provides eligible workers with a federal tax credit of 65% of qualified health insurance premiums, however such credits are neither fixed nor are they tied to purchase of affordable health insurance plans.
  • States. A handful of states have experimented with employer tax credits aimed at small firms to encourage expansion of coverage, but these are neither fixed nor tied to the purchase of affordable health insurance plans.
  • Other Countries. No other major industrialized nations have adopted this approach to covering their uninsured.