Health Reform Through Tax Reform: A Primer

Copyrighted and published by Project HOPE/ Health Affairs as: Jason Furman, “Health Reform Through Tax Reform: A Primer,” Health Affairs, Volume 27, Number 3, 2008, pp. 622-632. The published article is archived and available online at www.healthaffairs.org.

Abstract

Tax incentives for employer-sponsored insurance and other medical spending cost about $200 billion annually and have pervasive effects on coverage and costs. This paper surveys a range of proposals to reform health care, either by adding new tax incentives or by limiting or replacing the existing tax incentives. Replacing the current tax preference for insurance with an income-related, refundable tax credit has the potential to expand coverage and reduce inefficient spending at no net federal cost. But such an approach by itself would entail substantial risks, so complementary reforms to the insurance market are essential to ensure success.

Just about every health insurance reform proposed by the major presidential candidates in the 2008 campaign has accorded a central role to taxes, as do numerous proposals by members of Congress and policy analysts. For some, the goal is to expand insurance coverage—which requires, inter alia, subsidies to reduce the cost of health insurance to enrollees. For others, the principal focus is on reducing what is perceived as excessive health spending by the currently insured, either by reducing current tax incentives that encourage spending or by creating new tax incentives intended to reduce spending. Some reforms simultaneously try to achieve both mutually reinforcing goals.

Part of the motivation for making tax changes an important part of health reform stems from the fact that the tax system already plays a major role in shaping health insurance. Another motivation is that tax subsidies can build on the existing infrastructure for tax administration, making it a familiar and administratively simple way to achieve the goals of health reform—and in particular, to target assistance based on income. Finally, policymakers from both political parties have also been attracted to using the tax code for health reform because of the perception that the public prefers measures described as “tax cuts” to substantively similar measures that are treated in budgetary conventions as “spending increases.”