Income-Related Tax Credits

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Voluntary Health Reform >> Income-Related Tax Credits (last updated 2.26.17)


These plans generally provide for income-related tax credits in the nongroup market for individuals and small businesses (replacing the tax exclusion for employer health benefits for the latter groups and typically capping the exclusion for larger employers). Some plans make these universal, i.e., replacing the tax exclusion entirely for all employers; some plans couple this with reform of Medicaid and Medicare.

Legislative Proposals

Ten Steps to Transform Health Care in America Act (Enzi)

Empowering Patients First Act (Price-original version)

  • HistoryH.R. 3400 first introduced 7.30.09 (54 cosponsors); re-introduced 9.21.11 as H.R. 3000 (42 cosponsors); and subsequently as H.R. 2300 (6.4.13) by Rep. Tom Price.
  • Summary. This now-outdated version of the bill gave individual taxpayers earning up to 200% Federal Poverty Level (FPL) a full credit ($2,000 per individual, $4,000 per family), while those between 200% and 300% FPL receive the credit on a sliding scale starting at 100%, and reduced by one percentage point for each $1,000 by the taxpayer’s adjusted gross income. The most recent version of H.R. 2300 provides age-related tax credits. Section-by-section summary of H.R. 2300.
  • Analysis. An independent review of this plan (updated April 2014) produced by former Congressional Budget Office Director Douglas Holtz-Eakin has estimated the legislation would save $1.7 trillion while reducing health care premium increases.

Obamacare Replacement Act (Paul)

  • History. S. 222 introduced by Sen. Rand Paul (R-KY) on 1.24.17.
  • Full TextObamacare Replacement Act.
  • Summary. This plan retains ACA tax credits, which are income-related. See three-page summary by Kaiser Family Foundation.
  • Analysis.

Other Proposals

AMA Proposal for Health Insurance Reform

  • History. Based on in-house modeling work published in June, 2000, a formal American Medical Association proposal was published in JAMA on 5.12.04.
  • Summary. This approach, endorsed by the AMA and several health economists, would replace the current tax exclusion for employer-provided coverage with universal income-related, refundable and advanceable tax credits for those who purchase at least catastrophic health insurance coverage; states would be responsible for creating more affordable health insurance options for small employers or individuals by creating health insurance exchanges and mechanisms for addressing high risk individuals. The American Medical Association supports the foregoing reforms on a voluntary basis, but has not endorsed any specific value for the tax credits or income levels at which subsidies for the purchase of coverage should be phased out.
    • Eligibility: all U.S. residents would be included, with the possible exception of those on Medicare. Except for Medicaid long-term care, all means-tested health programs such as SCHIP would be eliminated. Medicare could either be retained as a separate program, phased into private coverage over time, or beneficiaries could voluntarily choose between Medicare and private coverage. Those failing to obtain coverage could be auto-enrolled in a government-designated “fallback plan” available in each geographic market.
    • Benefits: the maximum level of out-of-pocket spending under a qualified plan would vary with income, with no (or minimal) patient cost-sharing for those with the lowest incomes and a sizable amount of cost-sharing permitted for those with higher incomes. All qualified plans would cover “core” acute-care benefits for those reaching the catastrophic expense threshold; the federal government would define core services as it now does for mandatory services covered under Medicaid. Individuals would be permitted to purchase additional benefits or policies with less cost-sharing, but the added costs of such policies would not be subsidized. Medicaid would continue to provide subsidized long-term care coverage for those who need it.
    • Freedom of Choice: individuals may obtain their coverage through an employer, private individual insurance, private health plan (e.g., HMO) or government-designated “fallback plan” in each geographic area (selected through competitive bidding); more comprehensive coverage could be purchased with after-tax dollars.
    • Financing: everyone would receive a refundable, advanceable tax credit or voucher that would vary by income and possibly other actuarial factors (age, gender, family size or health status).  Since the lowest income families would receive a voucher sufficient to cover the premium for the fallback plan in their geographic area, the competitive. These subsidies could be largely or completely financed by eliminating the current tax exclusion for employer-provided health coverage and through Medicaid acute care savings.
    • Regulation: only the fallback insurer would be required to guarantee enrollment for any applicant; plans would have to offer “core” benefits, but could offer any other benefits desired (e.g., preventive benefits without cost-sharing) and there would be no regulation of premiums, provider reimbursement levels, methods of cost containment or types of providers that could be included within a plan.
  • Analysis.

Responsible Tax Credits


  • U.S. The Affordable Care Act uses income-related subsidies for individuals qualified to purchase coverage in the state health exchanges (generally, those in the individual and small-group market). Such subsidies are similar in effect to income-related tax credits except they are not universal. As well, the ACA includes individual and employer mandates that are incompatible with the spirit of voluntary tax credits.
  • States. Massachusetts is currently the only state with an individual mandate for health insurance in place, but it is coupled with an employer mandate to partially finance health insurance coverage, a feature philosophically at odds with the AMA models.
  • Other Countries. Switzerland’s national health system uses universal income-related subsidies for the purchase of health insurance, but coupled with an individual mandate somewhat more comprehensive benefits and regulation (e.g., community rating of premiums) than advocated by most U.S. proponents of income-related tax credits.

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