Tax Subsidies For Health Insurance: Costs And Benefits

PROLOGUE: There is growing support across the political spectrum—from Rep. Dick Armey (R-TX) on the right to Rep. Pete Stark (D-CA) on the left—for using federal tax credits as a sensible way to expand health insurance coverage. Tax credits would support the voluntary purchase of private insurance. However, a key question is how much broadened coverage the federal government could anticipate through this approach. In this paper Jonathan Gruber and Larry Levitt, using a new microsimulation model developed specifically for this purpose, assert that the ability of tax subsidies to greatly reduce the number of uninsured persons remains uncertain and unproven. But they also write that if Congress decides to pursue the expansion of coverage through changes in tax policy, some approaches are distinctly better than others are from the standpoint of sound public policy. Gruber is a professor of economics at the Massachusetts Institute of Technology and also directs the Program on Children at the National Bureau of Economic Research. During the 1997–1998 academic year he served as deputy assistant secretary for economic policy at the Treasury Department. Gruber earned his doctorate in economics at Harvard University. His particular research interests include the economics of employer-provided health insurance, the efficiency of current systems that deliver health care to the indigent, and the economics of smoking. Levitt directs the Changing Health Care Marketplace Project at the Henry J. Kaiser Family Foundation. He served as a senior health policy adviser during development of the Clinton administration's health care reform proposal. ABSTRACT: The continued rise in the uninsured population has led to considerable interest in tax-based policies to raise the level of insurance coverage. Using a detailed microsimulation model for evaluating these policies, we find that while tax subsidies could significantly increase insurance coverage, even very generous tax policies could not cover more than a sizable minority of the uninsured population. For example, a generous refundable credit that costs $13 billion per year would reduce the ranks of the uninsured by only four million persons. We also find that the efficiency of tax policies, in terms of the cost per newly insured, inevitably would fall as more of the uninsured were covered.