February 5, 2002

Administration's Budget Includes Additional Health Tax Cuts
That Primarily Benefit Higher-Income Individuals

by Edwin Park

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The Administration's fiscal year 2003 budget devotes $128 billion over 10 years for a number of tax cuts related to health care. The principal initiatives — a refundable tax credit for the purchase of private health insurance for people not covered by employer-based coverage and an expansion of Medical Savings Accounts, which are tax-advantaged personal savings accounts used by individuals covered by high-deductible health insurance policies — account for more than 70 percent of the cost and are discussed elsewhere.(1) However, the budget also includes several additional health tax cuts — including a costly deduction for the purchase of long-term care insurance — that are not likely to be effective in helping more people to secure insurance and whose primary effect would be to confer individual tax cuts on relatively affluent individuals.

Deduction for the Purchase of Long-Term Care Insurance

This proposal would provide a deduction for the purchase of long-term care insurance. The deduction could be used both for the premium costs of policies purchased in the individual market and for the employee's share of premiums for long-term care insurance offered through an employer if the employee pays at least 50 percent of the cost. Both those who itemize deductions and those who do not could use this deduction. The deduction would start to be available in tax year 2004 but would be phased in over four years. Starting in 2007, taxpayers could deduct 100 percent of the cost of long-term care premiums, up to certain limits.

The cost of the proposal is $21 billion over 10 years, but this cost is kept low by the slow phase-in. The cost is $16 billion just in the second five years of the ten-year period — more than triple the cost in the first five years.


Additional Health Tax Provisions

The Administration also proposes to permit taxpayers who care for family members with long-term care needs to claim an additional personal exemption on their tax return. The dependent family member would have to live in the taxpayer's household and be a spouse, ancestor, or spouse of an ancestor. As determined by a physician, the dependent also would have to need assistance with at least two Activities of Daily Living (ADLs) such as eating or toileting. The proposal would be effective starting in 2004 and cost $3.6 billion over 10 years.

The budget also includes provisions related to flexible spending arrangements (FSAs). FSAs for medical care are accounts into which employees can deposit a portion of their wages and from which they may pay for out-of-pocket health care costs. Funds deposited into the account do not count as wages or income for the employee for tax purposes. An employee may not carry over any funds left in an FSA at the end of the year.

The first Administration proposal in this area would permit amounts of up to $500 in a medical care FSA to be carried forward from one year to the next. Under the second proposal, employees could transfer up to $500 in funds that remain in their FSA accounts at the end of the year to their retirement plans or to Medical Savings Accounts. Both proposals would be effective starting in 2004. Their combined cost would be $8.4 billion over 10 years.

End Note:

1. Edwin Park, Health Insurance Proposals in Administration's Budget Could Weaken the Employer-Based Health Insurance System, Center on Budget and Policy Priorities, February 5, 2002.