President Bush has a new proposal for a tax law that would affect a large majority of Americans. The proposal would for the first time ever, create a tax deduction for health insurance. Some people would save a lot of money. Others will be left spending big bucks.
The new proposal seems simple. Taxpayers would pay for single insurance coverage would be eligible for an annual deduction of 7,500. Taxpayers who pay for family coverage would be eligible for an annual deduction of 15,000. This holds true for everyone, even if your insurance costs less then the deduction.
If an employer provides insurance coverage and it is worth more then the deduction then the taxpayer would be required to pay taxes on the difference. A worker whose employer provides approximately 20,000 worth of family medical coverage would be required to pay 5,000 in taxes.
Who would win? Who would lose?
People who buy and completely pay out of pocket for their insurance would now be getting a break. They would then be able to deduct the cost of their insurance on their taxes. If an employer also provides low-cost coverage, they would benefit also. It’s also an incentive to those without any insurance at all. The Bush administration estimates that more then 3 million people who have no insurance would now buy it due to the deduction. The people who lose are the ones whose health insurance at work is worth more then the deduction. Their healthcare benefit would now be taxed. It’s estimated that the “losers” in the deal would be approximately 30 million people.
The idea behind the plan was the Bush administrations feeling that the current plan is unfair. People whose employers provide health insurance do so as a tax free fringe benefit while others have to buy it on their own and get no breaks. By proposing this new law, their plan is to correct the current inequity so more people can afford to have health insurance coverage.
The Bush administration also believes the current system gives workers no motivation to choose benefit plans that help lower expenses. They also believe that the cost of health care would not be rising so fast if employees and employers were limiting the cost of health insurance to the amount of the deduction.
Other language in the proposal is the rate of change to the deduction. The Bush plan has the deduction rising each year by the rate of inflation. Currently, the cost of healthcare is raising faster then the rate of inflation. This means that over time the deduction could decline and more employees would be owing taxes with the cost of their coverage rising faster then the deduction.
The possible side effects of such a proposal could lead to employers no longer providing health insurance benefits to their employees or offering the worst coverage. Another possible side effect is on the lower income population. The lower-income population pays a lower tax rate. This would make the deduction less valuable to them. Many low-income persons don’t even owe income taxes.
With the Democrats dominating the house, the chances of this plan by President Bush are not so great. Democrats are warning that a plan like this would cause a tax increase to the middle class workers who receive good health care benefits from their employers. Labor unions are also not in favor of this plan.