Friday, September 5, 2008


I suppose this falls under the category of “Never Say Never”.

According to an article at titled “McCain's Economic Plan Aims for Tax Changes”, Republican presidential candidate John McCain “seeks to eliminate the tax break workers who receive job-based health insurance currently enjoy and replace it with a flat refundable tax credit of $2,500 for individuals or $5,000 for families with which to purchase their own insurance.”

As you well know, especially from yesterday’s post, I am strongly against refundable tax credits (including the current refundable Earned Income Tax Credit). However this one makes some sense.

Many of the “uninsured” individuals have lower incomes, and a large percentage either pays a minimal amount of federal income tax or does not pay any income tax at all. So deductions and “normal” (non-refundable) tax credits for health insurance premiums would be of no, or a very limited at best, benefit to these people.

The only way to encourage the purchase of health insurance is by actually giving the uninsured cash to pay for the premiums. And one of the only ways to do this (I can’t offhand think of a better way to handle this issue – other than enacting a direct government payment to insurance companies of the first $X,XXX of premiums for every household) is with a refundable credit.

Similarly, many uninsured are self-employed persons who, while paying no or minimal income tax, do pay self-employment tax. A refundable credit would offset the cost of the self-employment tax, while still continuing the benefit of contributing to one’s Social Security account, and could still provide some additional cash in hand.

I am not against doing away with the “pre-tax” status of employee payments for health insurance premiums, or even doing away with the tax-free status of the value of employer-paid health insurance, and would actually support a refundable credit for health insurance premiums paid. My concern is that the amounts of the credit that McCain has proposed are way too small for taxpayers in “my neck of the woods”. The amounts may be ok for Arkansas or Kansas (I just picked names out of a hat), but certainly not for New Jersey, which is especially known for its excessive health insurance costs.

My self-employed clients are paying $14,000 per year for family coverage! And in my case, even with a $10,000 deductible, $2,500 would not cover half of the actual cost (cost = $5,900+ or $9,075 with a $5,000 deductible).

Yet I do suppose that a monthly net “out of pocket” of about $290 is still better than $490+.

As I mentioned above the only alternative to using a refundable tax credit, with the downside that a person would have to pay the premiums first and wait until tax time to get the money, is for the government to send the money directly to the insurance company.

How would this work? I would go to the Horizon Blue Cross and Blue Shield website, for example, and apply for health insurance. After entering my information and choosing the coverage and deductible I would receive a quote. If I chose to enroll the annual premium would be reduced by the amount of the government credit ($2,500 or $5,000 proposed by McCain), and my monthly premium would be determined accordingly.
Or coverage would begin immediately, but monthly premium payments would begin once the credit amount was used up (i.e. the credit would pay the first three to five months of premiums). At some point the insurance company would apply to the federal government for direct payment of the credit amount.
Of course there would have to be a system to determine if any portion of the credit amount had previously been used by the insured during the appropriate calendar or fiscal period (it would have to be decided if the credit amount is applied on a calendar year or policy year basis).

So what do you think?


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