Examining McCain's Proposed Health Care Tax Credits

Jonathan Cohn has a very interesting article up on CBS News. In it, he examines a recently released paper from the Center for American Progress which dissects Sen. McCain's proposed tax credits -- tax credits that are supposed to fix our broken health care system.

Under our current system, group health premiums (e.g., insurance you get through your job) are exempt from both income tax and payroll tax. Sen. McCain has suggested doing away with that exemption and replacing it with a tax credit ($2,500 for individuals, $5,000 for families) tied to the purchase of individual insurance.

Via Mr. Cohn's article:

McCain's advisers say that the credit would grow at the rate of inflation -- that is, it'd get more expensive at approximately the rate of other goods (or, at least, how the government measures the price increases of other goods). Health care expenses, of course, keep going up faster than other expenses, mostly because of medical technology and the (largely unrestrained) demand for it. So if people kept paying for the same level of insurance, the tax credit would quickly fall behind: They'd end up paying more in taxes. According to the report, "In 2009, the credit will cover 36 percent of an average employer-provided family policy (based upon CBO projections). By 2018, however, the credit will cover only 24 percent of the cost of the same policy."

(This is all in addition to the fact that, for many families, the credit will not be enough to buy a policy — even now — because health care for families costs a lot more than $5,000 a year.)

Now, to its proponents, this feature of the tax credit — the fact that it increases so slowly — is a feature, not a bug. It's designed to encourage people to be more thrifty in their purchase of insurance. Ideally, they'll go for less generous policies — ones that don't subsidize so much wasteful care.

Mr. Cohn points out the crude nature of this approach to cost control, noting that it puts the entire weight of the problem on the backs of consumers while providing no guarantee that adequate health care will be forthcoming. No guarantee of available coverage, much less for pre-existing conditions. No limits on the amount of cost out-of-pocket for consumers.

One reason I enjoy Mr. Cohn's work is that he does embrace transparency in his writing. In the beginning of the article he notes that he has not yet had the opportunity to vet the report in full and that these are initial conclusions only. He closes with a reminder:

OK, and now to that caveat I promised at the beginning. Unlike Barack Obama, McCain hasn't been clear about exactly how he proposes to change the tax treatment of health insurance. And there are rumors around that they might not get rid of the existing deduction entirely, preserving it at least for payroll taxes. It's not clear how that'd affect the paper's conclusions, since the paper assumes the entire deduction goes away. But, of course, if McCain keeps some of the existing tax break, then either his plan won't have as dramatic effect period — or it will run up a higher deficit.

All in all, well worth reading, if for no other reason than to remind yourself that in the convoluted discourse on American health care it pays to dig below the surface on all claims and proposals.

SOURCE: "McCain’s Fuzzy-Math Health Care Plan" 07/05/08
photo courtesy of SoggyDan, used under its Creative Commons license