John McCain’s Health Tax Credit

Health insurance for most nonelderly Americans is purchased with funds from three sources: (1) an employer contribution, (2) an employee contribution and (3) a government tax subsidy.  The McCain health plan is based on the idea that the first two contributions should be determined by individual choice and competition in the marketplace.  The government's contribution, however, would be the same for everyone: $2,500 for every adult and $5,000 for every family. 

Problems with the Current System

Including state and local government, tax subsidies for private health insurance exceed $200 billion a year.  The distribution of these dollars is arbitrary, unfair and wasteful: 

  • Arbitrary: How much help a family gets from government depends on such factors as its tax bracket, the type of health plan the employer chooses, health costs in the city where the family lives, and state and local tax rates.

Example:  An upper-income family living in a high-cost, high-tax city could realize an annual subsidy of $10,000 or higher, while a low-income family living in a low-cost, low-tax city could receive a subsidy of $750 or less. 

  • Unfair: According to the Lewin Group, families earning $100,000 a year get four times as much tax relief as families earning $25,000. We give the most encouragement to those people who least need it and who probably would have purchased the insurance anyway.

Example:  A $10,000 health plan purchased by an employer for a family in a 50% tax bracket gets $5,000 of tax relief.  The same plan for a family in a 15% bracket gets $1,500 of tax relief. 

  • Wasteful: People can always lower their taxes by spending more on health insurance and there is no limit to how bloated a health plan can be. Theoretically, the plan could cover marriage counseling, over-the-counter purchases of aspirin or anything else the IRS consider a medical expense.

Example:  Some companies have generous, first-dollar coverage for executives and their families (all subsidized through the tax code), while the rank-and-file workers have deductibles, copayments and a more limited range of benefits. 

Special burdens for people who must purchase their own insurance.  Four in every 10 employers do not offer health insurance to their employees.  Yet when these workers purchase insurance on their own they must pay with after-tax dollars.  For a worker facing a 15.3% (FICA) payroll tax and a 15% income tax rate, the after-tax cost is almost 50% more. 

Special burdens for part-time workers.  About one in every five workers is part-time.  Often employers do not offer these workers health insurance.  And federal law makes it difficult, if not impossible, for employers to give them a choice between wages and health insurance.  If they buy insurance on their own, they must do so with after-tax dollars. 

Special burdens for the self-employed.  The self-employed are now able to deduct health insurance costs on their income tax returns.  But, unlike other workers, they get no relief from the 15.3% payroll tax.  For many, the payroll tax bite is larger than the income tax. 

Special burdens for women.  Because women move into and out of the labor market more frequently than men, they are more likely to purchase insurance on their own.  They are also more likely to work part-time and increasingly they are self-employed.

How the McCain Tax Credit Solves These Problems

The McCain Plan is Fair.  Everyone is treated alike, regardless of income or job status. 

The McCain Plan provides much more help to low- and average-income families than the current system.  For the first time since World War II, low- and moderate-income families would get just as much tax relief as the very rich to purchase health insurance. 

Relative to his Democratic rivals, the McCain plan is much better for the middle class.  Hillary Clinton and Barack Obama would continue the current practice of giving the vast bulk of federal help to the rich (through tax subsidies) and the poor (through spending programs).  By contrast, the McCain tax credit gives the most new tax relief to the broad middle class. 

The McCain plan would end discrimination against people who must buy their own insurance.  People who must purchase their own insurance (including part-time workers and the self-employed) would get just as much tax relief as people who obtain insurance through an employer. 

The McCain plan encourages all Americans to control costs.  The McCain tax credit subsidizes the core insurance that everyone should have.  It does not subsidize all the bells and whistles, as the current system does.  Since employees and their employers will be paying for additional coverage with after-tax dollars, everyone will have an incentive to compare the value of extra health benefits to the value of other things money can buy. 

Attractive Features of the McCain Tax Credit

The McCain plan not only offers all Americans the same tax relief, it does so in a way that makes it as easy as possible for people to acquire insurance. 

  • The Credit is Refundable. People can apply $2,500 per person or $5,000 per family to the purchase of health insurance, even if they do not owe any income taxes.
  • The Credit is Advanceable. Families will not have to wait until April 15 the following year to get their credit. They can obtain the subsidy in the year in which the insurance is purchased.
  • The Credit is Transferable. Insurance companies and other intermediaries will be able to help families obtain their credit and apply it directly to the health insurance premiums.

Comments (34)

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  1. Brian Shelley says:

    If companies no longer paid for health insurance, would this lower the marginal costs of employment? If so, would that increase the demand for employment, and thus lower unemployment?

    Or, on the other hand, would employers simply bid up paycheck wages to the previous total?

    If the first, then this should be touted along with it. If the second, all the claims about global competitiveness being affected by health care costs for employers seems to be bunk.

  2. John Goodman says:

    Under the McCain plan almost all companies that currently provide health insurance will continue to do so. But everyone will get the same tax relief, regardless of how the insurance is obtained.

  3. David R. Henderson says:

    Dear John,

    Excellent analysis. One criticism, though. I think you and the tax and health policy community generally use the word “refundable” in a way that cannot be justified. Something cannot be refunded if it is never paid in the first place. The language is important because it suggests that they paid it in the first place.

    Best,

    David

  4. Bud Blate says:

    Group insurance is guaranteed issue. My spouse or I are unable to purchase health insurance in the individual market. If employers react by paying higher salaries and dropping healthcare insurance, what happens to people like us?

    Individual guaranteed issue plans are not currently the answer as they differ from standard individual plans in premium and coverages offered as well as lifetime maximum.

  5. William C (Bill) Waters MD says:

    This is the last hurrah for American medicine and the last hope for resuscitation of that critical vestigial remnant, internal medicine.
    I emphasize this in my upcoming book, TWO DAYS That Ruined Your Health Care (and how you can provide the cure).
    My last words: This is a good time to vote.
    Bill Waters

  6. Ron Bachman says:

    I do not understand why conservatives have bought into the liberal idea that tax-relieved purchases of health insurance through employers a bad thing.

    1) "High income" workers (top 5%) pay 40+% of income taxes. High income workers pay 3% of all their income to cover Medicare for the elderly. After paying higher Medicare taxes their whole working careers, those with higher income are then asked to pay more for Medicare. (Republicans have become Democrats in accepting a premise that the successful should be taxed more). So what is the problem if some of that "highly progressive" taxation is partially offset by employer-based health taxation policy?

    2. Employer-based health insurance covers 180 million workers. 95% of workers in group of more than 100 lives have are offered insurance through the employer. Don't destroy what is working in the private market.

    3. A single "average" tax credit would prove inadequate for older purchasers, who when included in group plans have their costs averaged in with younger employees. A single one-size fits all tax credit would lead to more uninsured above age 50 where individual costs are 2-2.5 times the average cost. This process will increase the uninsureds at older ages and will provide the opening for national universal coverage advocates to expand Medicare down to age 50. Conservatives should see the pattern, drop Medicare for older workers and increase coverage under SCHIP for younger ages. Ultimately, we get Washington-based healthcare by a thousand slices. I love McCain on many issues. His health proposals for expanding individual markets and greater portability are admirable, but the tax credit idea is a BAD one that too many Republicans seem to be buying into at their peril. We should not fall into the trap that the liberal want – to create the largest tax increase in history. The Joint Economic Council has been trying to eliminate this "tax subsidy" for years? Of course, this mentality assumes that all of ones earning belong to the government and they allow us to keep only what we need. Taxes should be applied after basic living expenses. Health insurance is certainly a basic need these days.

    4. Expecting any "savings" to make it to equal tax credits will not likely happen anyway.

    5. The real federal tax solution is to equalize the tax benefits of individual purchases with those of group plans, not to eliminate the current group tax benefits. Other tax solutions involve removing state premium taxes, allowing rewards & incentives for wellness, prevention, compliance with treatment plans, expansion of HSA/HDHPs, and many other government barriers to more affordable insurance.

  7. Jeremy Smerd says:

    You say the McCain tax credits are refundable, transferable and advanceable. is that your language or McCain’s? I can’t find it anywhere. All I can find is a speech in which he says:

    “You simply choose the insurance provider that suits you best. By mail or online, you would then inform the government of your selection. And the money to help pay for your health care would be sent straight to that insurance provider. The health plan you chose would be as good as any that an employer could choose for you. It would be yours and your family’s health-care plan, and yours to keep.”

  8. John Goodman says:

    It’s the language difference between a candidate and a policy wonk. But in essence we are saying the same thing. All the tax credit proposals on Capitol Hill are refundable, transferable and advanceable.

  9. Art Jetter says:

    It’s unfortunate that so many people mistakenly or falsely characterize McCain’s health tax credit as the ruin of employer sponsored group insurance. Nothing could be further from the truth. McCain removes no tax incentive from employers. McCain’s credit would give the same tax incentive for employees to stay on the group plan as it would give someone who buys their own personal policy.

    Employers provide employee benefits to compete for, hire and retain quality employees; not because of any tax treatment each employee might receive. Most employers pay a substantial part of the group premium to subsidize employee participation. McCain does nothing to alter that.

    What employers and employees alike might find attractive is the effect McCain’s credit bringing younger families back to group medical insurance. By increasing the participation of younger healthier individuals, loss ratios should reduce, thereby stabilizing or reducing employee premiums.

  10. Art Jetter says:

    Should the tax break on health insurance be flat or should it be related to one’s marginal income tax bracket, as it is today?

    Those in favor of the current break that increases with the marginal income tax bracket say, it’s the high income tax payer who should get the substantial tax break because they are the ones paying the taxes.

    However, this theory overlooks the fact that the high taxpayer is already paying for welfare healthcare.

    The benefit to the taxpayer of a flat credit is this: Currently, the substantial payers of income tax pay for the entire welfare system. This welfare system trains people to be dependent upon welfare, which means the higher taxpayer will just have to pay more as the welfare system takes more and more of the population into its high taxpayer funded healthcare system.’

    Better to use this same tax money to create more consumers, train future Americans to be consumers and stop the reliance on never-ending funding of “free” welfare healthcare.

  11. T Rosenwasser MD says:

    Let people buy their insurance anywhere in the nation. Do not let legislators tell insurance companies what they have to offer in their policies. For a first step in getting rid of Medicare and Medicaid with their perverse incentives, and their open-ended bestowal of the total power of the purse to people who do not pay the bills, turn these into catastrophic policies. As a physician, I see people for every bit of medical trivia on Earth. No problem these days, as long as the TAXPAYERS ARE FORCED TO PAY THE BILLS, is too trivial for the Medicare and Medicaid crowd to come crowding into the office. Even if the problem is resolved by the time of their appt, they come in to tell me what WAS the problem.

  12. Cameron Station says:

    Thanks — good stuff….

  13. Bob Blandford says:

    McCain’s plan seems to have a lot in common with my approach which puts a similar amount of money into everyone’s HSA from birth to age 21. There are many more details, of course.

    http://www.plan.bipartisanhealthplan.com

  14. Ron Bachman says:

    So tell me again why older employers will be better off under a tax credit instead of the current employer average age rated premiums that cover 95% of workers in groups of 100 or more. The problem is not a distorted employer tax law, it is the inability of small employers to subsidize premiums, products that are responsive to needs, state tax laws that only add costs, and the lack of an equal tax structure for the purchase of individual portable health insurance.

    Why will they not ultimately ask for Medicare to cover down to age 50 or 55 with a government subsidy? Why will this not lead to nationalized healthcare?

  15. David Engel says:

    I think the tax aspects of Sen. McCain’s plan are more equitable than the current system. Basically, it ends the unlimited exemption provided for employer provided insurance and replaces it with a credit that is available to all, regardless of whether they have employer provided health insurance.

    I also believe that the current system’s subsidy for health insurance creates a very inefficient third party payment system that works poorly for both patients and doctors. Under the current tax code, it makes more sense to pay $130 for health insurance (or flexible spending accounts) than to pay out of pocket $100 of medical bills. That makes no sense whatsoever. You are creating incentives to replace efficiency (patient paying the doctor) with inefficiency (insurance company paying the doctor or pharmacy).

    Regarding Obama’s proposals to provide lower cost insurance to the poor, I think this is very problematic. Obama’s plan creates a big incentive to report lower income to get those subsidies. So people work off the books, don’t report tips, etc. If self-employed, people increase their business expenses. Effectively, you are creating a very large marginal rate in the income range where those subsidies are provided.

    Now Sen. McCain’s proposal isn’t perfect. He hasn’t been clear with respect to how he is going to provide insurance for the dificult to insure. (Possibly, he needs to increase the credit with age.) But his plan at least addresses some major problems in the system, is more equitable to those without employer provided insurance and may provide incentives to reduce costs.

  16. Chris Ewin says:

    Obama and McCain have no clue how to fix my business.

    Pics are worth a thousand words. Below is the problem. Hint: it starts on the left… (fever and cough)

    (Garrison Bliss created this)

    Crazy, but true.

    I’m transitioning Docs to my fee for care model. One 3 weeks ago made $300 profit last month. Yes, her front desk MA makes more than her.

    A new for-profit Doc in Fort Worth isn’t even trying to start a practice. What a waste of all those years in practice…

     

  17. Susan smith says:

    it is interesting to me that “tax credits” seem fair when the poorest pay so little in taxes already, that this would change nothing: no money, no healthcare. In addition, McCain’s plan ignors the obvious: healthcare remains a profit-driven commodity when it should be viewed as a “utility,” regulated and fair because everyone…literaly everyone…needs it. In addition, if physicians were paid substantial salaries, not fee for service, tnere would be no incentive to run up bills. In other countries…other countries industrialize…our system is looked at as archaic. We have the best healthcare in the world…FOR SOME, NOT FOR ALL. For those who have money, great. Hor those who don’t, we will give you a credit on what???

    Mr. McCain, when was the last time you worried about paying for a medicine you needed, cutting your dosage in half to make it go farther, not going to doctor for fear of costs or fear of begin dropped by your employer or insurance company??????

  18. Pat says:

    None of this takes into account those of us who thrive best when seeking alternative care. We have to pay for this out of our own pockets, and I have yet to see the plan that will change that.

  19. Pat Rooney says:

    John, I think your piece of July 30 is excellent.

  20. Peter says:

    This is not entirely relevant to this post, but I wanted to address your comment as written in the Dallas news: “Anyone with access to an emergency room effectively has insurance, albeit the government acts as the payer of last resort.” Oh, really, Mr. Goodman? As a physician and having closely seen the differences in standard of care of ER’s and individual family physicians, you really are in way over you head with that comment. You should forego your health insurance and try using only ER’s for the next year, then come back and tell me people with access to ER’s effectively have health insurance. What an incredibly ill-informed comment.

  21. Jim Kneser says:

    Dear Mr. Goodman.

    Could you please explain how McCain’s refundable credits will be financed? I understand that the amount of the subsidy for tax deductibility (roughly $200 bil) will be available, but that does not seem to be enough if, in deed, every American household is to receive a refundable credit (roughly 130 million tax returns). Will additional funds be required and, if so, from what source will they come? Thank you for considering my request. If possible, please email your reply to me.

  22. Anne says:

    Interesting. All this praise for continuing with the for-profit health insurance industry. Why? What percentage of the health care dollar will continue to be spent on marketing of competing health plans, administration of the health plans, and other such non-medical care items? Let us not forget time and energy spent by consumers trying to determine which plan is best for them–something which can, BTW, change in the blink of an eye. Then there is the need to create of a special system for the so-called “hard-to-insure” and the concomitant need for regulations to keep that part of the “system” as fair as possible. The U.S. currently spends almost twice as much per capita as Canada for its health care. Both systems have their shortcomings but imagine what could be done with a system that continued to put the same amount as the U.S. is currently spending into single-payer health care that covered everyone. And with a much higher percentage of that money going for actual medical care. Add in a commitment to remaking the whole health care system so that it fit the 21st century rather than being an archaic system that uses high tech here and there as well as a commitment to creating a healthy citizenry rather than to making profits for those who already have quite a lot in life. I have nothing against profit, BTW, I just don’t believe it should be the primary and driving force behind how our health care system is organized. I realize that this view will probably be quite unwelcome at a site that seems dedicated to rearranging the deck chairs on the Titanic that is health care in the U.S. today and that is full of people who shake in their boots at the thought of “socialized” health care for reasons perhaps best left unexamined since they are hardly so noble as many would like to believe.

  23. ari-freedom says:

    Wouldn’t it be better if instead of introducing a special tax credit for individual insurance to counter the tax subsidy for employer based insurance, that we simply have no special deduction for anything and just increase the standard deduction or lower tax rates (flat tax)?

    Because every time we introduce a special break for a certain good, the cost of that good goes up as the market is distorted. Just look how expensive college tuition is, despite all of the subsidized loans and grants.

    I like the part of the McCain plan that allows the purchase of out of state insurance. However, there are lots of other regulations and mandates that add to the cost and inflexibility of insurance options.

  24. [...] McCain health plan subsidizes, dollar-for-dollar, the core insurance everyone should have, forcing people to buy [...]

  25. [...] the reasons why economists tend to like proposals such as the McCain plan. [See my description (here).] That is, it ignores the expected benefits: First, the current system of $250 billion in annual [...]

  26. [...] The McCain Plan. There are two principal elements: (1) McCain would replace the current arbitrary, wasteful, and unfair system of federal tax subsidies for health insurance with a system under which all families get the same tax relief for private insurance, no matter how it is obtained. (2) He would also allow people to buy insurance across state lines, effectively allowing a national market to develop. [...]

  27. [...] The McCain Plan. There are two principal elements: (1) McCain would replace the current arbitrary, wasteful and unfair system of federal tax subsidies for health insurance with a system under which all families get the same tax relief for private insurance, no matter how it is obtained. (2) He would also allow people to buy insurance across state lines, effectively allowing a national market to develop. (See the NCPA analysis here.) [...]

  28. [...] way the federal government subsidizes private health insurance — along the lines suggested by John McCain during the election and in a bill by Sens. Tom Coburn and Richard Burr and Reps. Paul Ryan and [...]

  29. Jamie3 says:

    John McCain is also a good politician and he got some good political ideology. i admire John McCain more than Obama,

  30. Jadee says:

    John McCain might have been a good US President but the people in the US does not need another Republican, that is why he lost in the election. Obama perfectly states the need of the people in his campaign slogan and that is “change we can”.

  31. [...] McCain health plan, by contrast, would have substituted a new and better tax regime for the current one. People would [...]

  32. [...] McCain health plan (summarized by me here) provides a uniform tax subsidy to all insurance regardless of how it is purchased.  And that is [...]

  33. Mike Habib says:

    The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the “premium assistance credit”) for eligible individuals and families who purchase health insurance through an exchange. More Info.

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