Plans to Seek Tax Break For Private Health Insurance
By John D. McKinnon
The Wall Street Journal
Sunday, January 21, 2007
WASHINGTON -- President Bush will propose a sweeping change
in the way the government taxes health-care insurance, in an
effort to make coverage cheaper and more widely available.
In his weekly radio address, Mr. Bush suggested he will seek
to extend tax deductibility of health coverage to people who
buy it outside the workplace -- especially to people who are
self-employed or work without traditional benefits.
Currently, the government doesn't tax employer-provided
health insurance benefits, but gives smaller breaks, or none
at all, to people who buy insurance outside the workplace.
One way to eliminate the inequity "is to treat health
insurance more like home ownership," Mr. Bush said. "The
current tax code encourages home ownership by allowing you
to deduct the interest on your mortgage from your taxes. We
can reform the tax code, so that it provides a similar
incentive for you to buy health insurance. So in my State
of the Union Address next Tuesday, I will propose a tax
reform designed to help make basic private health insurance
more affordable -- whether you get it through your job or on
In its proposal, the administration will recommend a flat
standard deduction for both self-purchased health insurance
and for employer-provided coverage. The level for a family
would be $15,000, and for individuals it would be $7,500,
someone close to the administration said over the weekend.
A family earning $60,000 would get a total tax savings of
about $4,500 under the plan, this person said. That
includes $2,250 of income tax savings and an equal amount of
savings from payroll taxes for Social Security and Medicare,
which the deduction also could be used against under the
Conservative economists believe the change would encourage
many more people to buy health coverage, and would touch off
intense competition in the insurance marketplace and thereby
help hold down prices. White House officials think the
change also would encourage more people to switch to
coverage with higher deductibles, in order to maximize their
personal savings. That could produce further downward
pressure on costs, by giving consumers more incentive to
purchase health care more carefully. The average annual
premium for employer-provided insurance for a family is
around $11,500, but families can buy high-deductible
coverage for themselves in the insurance market for an
average of $5,200 -- little more than the amount a typical
family could save on taxes under the administration plan.
Some people could even make money by acquiring health
coverage. For example, a single 30-year-old making $40,000
could buy coverage for as little as $1,000 a year and would
get a tax break worth $2,250 for doing so.
In fact, officials believe many younger, healthy people who
now don't buy coverage would do so, benefiting the insurance
system as a whole. "This is a huge incentive for the
uninsured to get coverage," a senior administration official
said. "People currently buying policies on their own will
get a big benefit that they've never had before. And for
many of the uninsured and underinsured, health insurance
will finally be within reach."
Despite the plan's appeal, its effective cap on
deductibility of employer-provided coverage will be
controversial with some Democrats, who are focused on
shoring up the troubled workplace system of insurance, and
worry that the White House proposal would undermine it.
Many Republicans counter that the traditional unlimited tax
break available for employer-provided care is actually part
of the problem with the U.S. system, and contributes to
overspending and rapid inflation in the health-care sector.
Mr. Bush said in his radio address that the tax code
"unwisely encourages workers to choose overly expensive,
gold-plated plans. The result is that insurance premiums
rise, and many Americans cannot afford the coverage they
The person close to the administration said 80% of people
receiving employer-provided coverage would come out ahead
financially under the plan, but 20% would be losers. About
17 million people are buying health insurance themselves,
and all of them would be winners under the plan. Even the
40% or so of Americans who don't pay income tax could
benefit from the break on payroll taxes, the person said.
Cracking the problem of health-care inflation is emerging as
a major political issue for the foreseeable future, due to
the persistent rapid rise in costs, employer efforts to
shift more of the burden to workers, and the aging of the
baby boomer generation. Big corporations and insurers as
well as labor unions are launching their own new efforts to
find solutions. Still, the odds of major legislation in the
current Congress appear long, and health care is likely to
be a big point of contention in the 2008 presidential race.
In the meantime, Republicans and Democrats are sharpening
The new White House proposal bears strong resemblance to a
plan put forward in 2005 by Mr. Bush's Advisory Panel on
Federal Tax Reform. It proposed capping the exclusion from
income for employer-provided health care at $11,500 for
families and $5,000 for singles. The recommendation, which
has languished with the tax panel's other reform proposals,
came after witnesses told the tax panel the existing federal
tax subsidies for health insurance were benefiting rich
workers while raising insurance prices for the poor and
increasing the number of uninsured.
The current policy of excluding health benefits from
taxation is thought to be the most expensive single tax
break the government provides. According to the Advisory
Panel on Federal Tax Reform, tax benefits associated with
health care will cost approximately $141 billion, or 12% of
all federal income tax revenue, for 2006. The largest
component of this cost is the employee exclusion for
employer-provided health insurance and medical care, a tax
expenditure of $126 billion. The immediate budget impact of
the White House plan weren't available, but the person close
to the administration said the budget effects over 10 years
would be nil.
Mr. Bush's health-care proposal will inject him into a
debate that is heating up in a number of state capitols.
Most recently, California Governor Arnold Schwarzenegger
announced a $12 billion plan to require uninsured
Californians to carry insurance. Mr. Bush said he would
propose new efforts to support governors and state
legislatures who are creating insurance pools to help reduce
the numbers of uninsured.
contributed to this article.
Write to John D. McKinnon at