Standard Tax Deductions

VII. Key Issues: Regulation & Reform >> C. Health Reform >> Voluntary Health Reform >> Standard Tax Deductions

Basic Design

This proposal is similar to the fixed tax credits approach, but instead would replace the current tax exclusion for employer-provided coverage with standard tax deductions for all individuals and families. President Bush suggested this approach in his 2007 State of the Union message. However, the Bush administration has proposed many other initiatives to make health care more affordable, such as funding of community health centers, medical liability reform, and health information technology initiatives. However, such initiatives could accompany any of the voluntary health reform options.

Eligibility: all U.S. taxpayers who purchase health insurance, whether or not they itemize deductions and whether or not they obtain such coverage through an employer, would be given a standard deduction that would avoid their having to pay income or payroll taxes on the deduction amount ($7,500 for individuals and $15,000).
Benefits: any health insurance plan meeting federal standards for the tax exclusion would qualify for the new standard deduction, i.e., any health plan with at least catastrophic health benefits. This would include any health plan that is ERISA-eligible or allowed to be sold within a state so long as it met federal mandates such as mandated maternity coverage and 48-hour hospital stays after a well-baby delivery if requested by the patient and physician. There would be no additional restrictions on the form or scope of coverage. For those already covered by employer-based health plans, the employer share of premiums would become taxable income, so this proposal is the equivalent of capping the current tax exclusion (e.g., a family currently receiving a $20,000 a year policy from any employer would have $5,000 additional taxable income once the new deduction was taken into account). Each year, the amount of the deduction would increase by changes in the Consumer Price Index.
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 their tax savings could keep the savings and those purchasing more expensive coverage would do so with after-tax dollars. Taxes would increase only for families whose current employer-provided coverage costs more than the amount of the allowable deduction.
Financing: this proposal would be financed in part through savings from capping the current tax exclusion for employer-provided health benefits; any additional funding would come from general tax revenues.
Regulation: this would entail minimal regulation, as there are no new restrictions on the types of health plans for which individuals could receive a federal tax subsidy. Some changes in tax forms/reporting for individuals and employers would be required, but the system basically could be enforced using the IRS.

Theory

Federal. This plan was first proposed in the 2007 State of the Union message.
- Executive Office of the President. Affordable, Accessible, And Flexible Health Coverage. Last updated January 24, 2007.
- Al Hubbard. Ask the White House. January 26, 2007.
- Executive Office of the President. Press Briefing on the President’s State of the Union Health Care Initiative (conducted by Julie Goon, Special Assistant to the President for Economic Policy and Katherine Baicker, Council of Economic Advisors), January 22, 2007.

John Sheils and Randy Haught. President Bush’s Health Care Tax Deduction Proposal: Coverage, Cost and Distributional Impacts. Fairfax, VA: The Lewin Group.
Len Burman, Jason Furman, Greg Leiserson, and Roberton Williams. The President’s Proposed Standard Deduction for Health Insurance: An Evaluation (Washington: Urban Institute and Brookings Institution Tax Policy Center, 2007).

Practice

Federal. The Trade Adjustment Assistance Reform Act of 2002 created a Health Coverage Tax Credit that provide eligible workers with a federal tax credit of 65% of qualified health insurance premiums. his plan was first proposed in the 2007 State of the Union message.