11.1: Tax Credit

End the tax exclusion for employee compensation in the form of employer-sponsored health insurance and introduce a new uniform, nonrefundable federal tax credit to assist families in their purchase of health insurance.

Other Information:

A New Health Tax Credit. The Heritage plan ends the existing tax exclusion for employee compensation in the form of employer-sponsored health insurance. This means that the value of employer-paid health insurance premiums is included in the employee's total taxable compensation. Today's system excludes this compensation from income and payroll taxes, effectively giving upper-income workers in high-tax brackets a large tax benefit. In return for ending this tax break, the plan introduces a new uniform, nonrefundable federal tax credit to assist families in their purchase of health insurance. Employers and employees could decide whether to have the employer continue to buy coverage or to cash out the existing coverage in the form of higher cash income. Either way, the tax break for coverage would change from an exclusion to a credit. The net value of the credit is $2,000 for an individual and $3,500 for a couple or family. Under the Heritage plan, this credit can be used either to offset the cost of coverage offered through the workplace or to buy insurance outside the workplace. For most middle-income working families, the value of the credit is similar to the tax relief that they receive for health insurance today. For upper-income households, the new credit is typically less and is reduced as income rises. The phaseout begins at $50,000 for an individual and $100,000 for a family. The credit is fully phased out at $90,000 for an individual and $170,000 for a family. The credit is advanceable, assignable, and available on a prorated basis. This means that the credit is available when premiums are due, enabling families to claim the credit for premiums already paid before the end of the tax year. An assignable credit allows a family to assign their tax credit to a health plan in return for a dollar-for-dollar lower premium, eliminating the need to claim it on their own tax forms. It is important to note that health care benefits are a form of worker compensation directed by the employer and are not "paid for" in any charitable sense by the employers. Therefore, in the labor market, employers would likely adapt to the tax reform either by increasing the wages for their employees instead of offering health insurance or by continuing to offer coverage to their employees. Either way, we know from research that the employee's overall compensation should stay the same in most cases. There is no mandate on individuals to obtain insurance, but if they did not obtain coverage, they would have to forgo the credit or assistance for insurance. Importantly, the Heritage plan envisions much wider use by employers of auto-enrollment mechanisms in the future, with employees automatically enrolled in a plan as the default option. Research suggests that such an auto-enrollment approach, combined with tax incentives or subsidies, is likely to result in high rates of enrollment under the credit system.

Stakeholder(s):

• Employees


• Families

Indicator(s):

Indicator:1

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