Bush Proposes Standard Deduction For Health Insurance

by Mike Godfrey, Tax-News.com, Washington

25 January 2007

As expected, in his State of the Union address on Tuesday, President George W. Bush outlined details of proposals for tax reforms to increase the take-up of private health insurance among American citizens.

The President's plan is spilt into two parts: reforming the tax code with a standard deduction for health insurance with the aim of ensuring that all Americans receive the same tax breaks with regards healthcare; and helping states make affordable health insurance more widely available to their residents.

Under the proposals, families with health insurance will not pay income or payroll taxes on the first $15,000 in compensation, while singles will not pay these taxes on the first $7,500 of their income. At the same time, health insurance would be considered taxable income. This is a change for those who now have health insurance through their jobs. It is said that this measure would result in lower taxes for about 80% of employer-provided policies. The remainder with more generous polices will have the option to adjust their compensation to have lower premiums and higher wages to offset the tax change.

For states that provide their citizens with access to basic, affordable private health insurance, the President's 'Affordable Choices Initiative' will direct federal funding to assist state authorities in helping their poor and hard-to-insure citizens afford private insurance. By allocating current federal health care funding this way, Bush said his plan accomplishes the goal of expanding healthcare coverage without creating a new federal entitlement or new federal spending.

Currently, the tax code penalizes people who do not have their health insurance provided through an employer and who buy insurance on their own, as they pay higher taxes for insurance than those who get it through their job. The self-employed pay no income taxes on their premiums, but because they still owe payroll taxes, they are also disadvantaged compared to those who get health insurance from their employer.

The system also discriminates against those who choose basic, affordable health coverage because more tax relief is granted for expensive employer-provided plans. This encourages many workers to choose lower wages and more expensive health insurance than they would choose if the tax code were not distorting their decision, pushing up the cost of health insurance premiums in the process.

The White House claims that the average tax bill for families currently purchasing their own health insurance would go down by more than $3,650 under the policy, which would be implemented in 2009. The average tax bill of a family without health insurance taking up new plans would fall by $3,350.

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