Tax Credits for Health Insurance

This legal analysis discusses the role that tax law can play in the implementation of health reform. The tax code has served as the primary vehicle for subsidizing health care in the United States, with subsidies averaging $245 billion per year.

Use of the tax code to support or implement health policy is extremely common in proposals at both the federal and state levels. There are no legal barriers to modifying the tax code, and tax law can be used in a variety of ways to shape health reform.

Key Findings:

  • The current tax exclusion for employer-based health insurance is regressive and contributes to escalating health care costs. A refundable tax credit would be progressive and could potentially hold down health care costs, but would need to be implemented without completely dismantling the current system.
  • Design challenges for tax-based health reform include eligibility standards, tax payer cash flow, use of mandates, and interactions with existing tax subsidies.

The Internal Revenue Service is the single governmental institution that interacts with virtually all citizens. As such, it is uniquely positioned to help implement health reform through the tax code.

This paper is part of the Legal Solutions in Health Reform project. It was created by the O’Neill Institute for National and Global Health Law at Georgetown University. The project aims to identify practical, workable solutions to the legal issues that may arise in any upcoming federal health reform debate.

Keywords: Access; Mandates; Legal issues/reforms; Regulation; Administrative cost/structure; Employer contributions; Reinsurance; Financing; High-deductible health plans; Insurance exchange; Public plans; Role of Medicare/Medicaid.