May 20, 1998
Roth Amendment Health Insurance Tax Deductions
Benefit Higher-Income, Already-Insured Families
by Iris J. Lav
Senate Finance Committee chair William Roth has indicated he intends to offer an amendment to the tobacco bill that would provide new or expanded tax deductions for the purchase of health insurance by those who are not covered by employer-sponsored plans. A similar amendment costing $18 billion over five years and $47 billion over 10 years was offered and defeated in the Finance Committee last week, but could have a stronger chance of passage on the floor.
Tax Deductions Provide No Help to Large Proportion of Uninsured
Helping uninsured people buy health insurance sounds like a good idea. But the families that can benefit from the tax deductions in Mr. Roth's proposal are, by and large, a very different population from the families that are uninsured.
The uninsured are heavily concentrated at low- and moderate-income levels. According to the Employee Benefit Research Institute, nearly 45 percent of all uninsured people live in families with annual income under $20,000 and 64 percent live in families with annual income below $30,000. A large share of these families owe no income tax; their earnings are too low. As a result, they would get no benefit from the proposed tax deduction, and it would not make health insurance more affordable for them. A family of four with two children and child care expenses of $400 a month, for example, has no tax liability if its income is below $31,000. The Roth plan wouldn't lower the cost of health insurance one dollar for such families.
Deduction Subsidy Insufficient to Make Insurance Affordable for Most Moderate- and Middle-Income Families
For moderate- and middle-income families who do have some income tax liability and pay a marginal income tax rate of 15 percent, the proposed tax deductions would not provide a sufficient subsidy to make health insurance affordable. Private health insurance purchased in the individual market is expensive. A recent study by the accounting firm KPMG Peat Marwick found that the average cost of a family health insurance policy purchased in the individual market is $6,226. The proposed Roth tax deduction would lower the cost of insurance to these families by only 15 percent, leaving the average cost of a family health insurance policy at $ 5,300. Families earning $25,000 to $50,000 who have foregone insurance because they cannot afford the $6,200 premium are likely to be equally unable to afford the net $5,200 cost of the premium after the tax deduction.
Higher-Income, Already-Insured Families Will Get Tax Benefit
Higher-income families, however, would benefit to a much greater degree. The health insurance deductions are worth more than twice as much to affluent individuals in the 31 percent, 36 percent, and 39.6 percent tax brackets than to moderate- and middle-income families in the 15 percent bracket. But most of these higher-income families are already insured. They would be able to deduct the premiums they currently pay. So most of the tax benefits from the Roth proposal would go to families and individuals at upper-middle-income and upper-income levels who are not uninsured and already are purchasing insurance in the private market.
Tax Deduction Is Financed by Regressive Tobacco Taxes
Who will pay for this tax break that largely will be captured by already-insured, higher-income taxpayers? Tax deductions for health insurance, like other elements of the tobacco bill that have a cost, would be financed by the proceeds of higher tobacco taxes or payments by tobacco companies passed through to consumers in the form of higher prices.
Increasing the cost of cigarettes, whether through a tax or other means, is inherently regressive that is, it will absorb a greater percentage of the income of lower-income households than of those with higher incomes. An analysis by the Joint Committee on Taxation shows that 45 percent of a tobacco tax increase would be paid by families with incomes below $30,000. Only 10 percent would be paid by families with incomes exceeding $75,000.
In general, consumption taxes are more burdensome for lower-income households than for those at higher income levels. This is particularly true for tobacco taxes, since a higher proportion of lower-income people smoke. The Joint Committee on Taxation estimates the $1.20 per-pack increase in the price of cigarettes would by the year 2003 take an average of 3.1 percent of income from families with incomes below $10,000 and 0.9 percent of income from families with income between $10,000 and $20,000. But the increase would absorb less than one-tenth of one percent of income from families with incomes above $100,000.
Tobacco legislation should not be turned into a mechanism that redistributes income from those with modest incomes to the more affluent. If tobacco prices are to be pushed up through new taxes or industry payments as a way of reducing the number of people, especially young people, who smoke, there are any number of better uses of this revenue.