Tax Subsidies for Private Health Insurance

IV. Conclusion

The examples show that the availability and amount of tax subsidies for health insurance vary by a number of factors, including the amount and types of income that a person or family may have and whether they receive coverage through work. Importantly, the different tax subsidies relate to income in different ways. The exclusion of employer and employee contributions from income taxes favor higher income families more than lower income families because these families face higher marginal tax. The accompanying exclusion from FICA payroll taxes behaves differently: it is the same for everyone with the same earnings until the earnings reach the Social Security limit. In contrast, the new tax credit for nongroup coverage is structured to provide more benefit to lower income families, and phases out as income rises, with no benefit for families with incomes above 400 percent of the federal poverty line. Families with higher incomes purchasing nongroup coverage can only receive tax assistance if they have high medical expenses (including their health insurance premiums) relative to their incomes.

These different tax subsidies can lead to quite different results for similar families receiving similar coverage, but through different sources. For example, a low-income family that purchases nongroup coverage in a public marketplace may be eligible for a premium tax credit that pays for most of their premium, but if that same family received the same coverage through work, the tax subsidy would equal only a small percentage of the premium. At the other end of the spectrum, a higher income person who receives coverage through work may receive a tax subsidy of over 40 percent of the premium, but may receive no assistance if they purchased an identical policy in the nongroup market.

The reason for the widely different results is that we have several different tax subsidies that were enacted at different times with different goals. There is no clear policy relating the availability of assistance to income or resources, which means that families with similar economic needs are treated quite differently depending on the source of their coverage.

This brief is an update of “Tax Subsidies for Health Insurance” published in June 2008 by Gary Claxton of the Kaiser Family Foundation and Paul Jacobs who formerly worked in that division.

III. Special Tax Deduction for Health Insurance Premiums for the Self-Employed Key Terms

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