One of our readers, Kevin, wrote to say he was confused by my description yesterday of the premium subsidy in Senate Finance Committee Chairman Max Baucus’ health reform plan as a tax credit. “It sounds like a voucher to me,” he wrote.
Sounds like a voucher to me too. Except it isn’t. The proposal would work like this: Everyone would be required to buy insurance, and low- and moderate-income people would get a government subsidy to help out with the premiums. The subsidy, however, is designed as a refundable tax credit paid directly to insurers. The size of the credit is based on an immensely complicated sliding scale. I can’t describe it any better than the Finance staff:
Beginning in 2013, tax credits would be available on a sliding scale basis for individuals and families between 134-300 percent of FPL to help offset the cost of private health insurance premiums. Beginning in 2014, the credits are also available to individuals and families between 100-133 percent of FPL. However, individuals subject to a five-year waiting period under Medicaid or CHIP are eligible for the tax credit beginning in 2013. The credits would be based on the percentage of income the cost of premiums represents, rising from three percent of income for those at 100 percent of poverty to 13 percent of income for those at 300 percent of poverty. Individuals between 300-400 percent of FPL would be eligible for a premium credit based on capping an individual‘s share of the premium at a flat 13 percent of income. For purposes of calculating household size, illegal immigrants will not be included in FPL. Liability for premiums would be capped at 13 percent of income for the purchase of a silver plan.
Just to make it more complicated, you must use your prior year tax return to determine whether you are eligible for the credit. But if your income rises for the current year, you may have to repay some of the credit--long after you bought the insurance.
Btw, the proposal defines income in an unusual way. It is not gross income or even adjusted gross income--the two concepts most of us are familiar with from our 1040s. Instead, it uses a rather flexible concept known as modified adjusted gross income (MAGI). This pops up here and there in tax law, but is defined differently from statute to statute. This version excludes foreign income, but includes both tax-exempt bond income and the income of any dependents. You will find it nowhere on your tax return.
So why would Baucus design this subsidy as a tax credit instead of a simple voucher? There are a couple of possible reasons. The first is because tax credits are what the Finance Committee does. The second is that these days tax subsidies are far more popular than spending (see Eric Toder’s nice post on this the other day). Never mind that they are spending, as our reader Kevin accurately notes.
Whatever you call them—tax credits, vouchers, or bananas—these subsidies are expensive. CBO projects the 10-year cost as $60 billion, but that is misleading since the credit doesn’t really begin to kick in until 2014. By the end of the budget window, in 2019, the annual revenue loss would be nearly $100 billion.
Still, these subsidies are the key to health reform. The government can’t make insurance companies sell to all comers unless everybody is required to buy. Otherwise, healthy people won’t purchase coverage until they need it, and this adverse selection will drive premiums through the roof. However, if government is going to force people to buy insurance, it must provide enough of a subsidy so they can afford coverage. Hence, the banana.
Is running all this through the Internal Revenue Service the most efficient solution? Somehow I doubt it. The Service is understaffed and overwhelmed as it is. Baucus would require the agency to verify income, citizenship, and changes in marital status; and share some individual tax information with insurance exchanges. It would also have to impose excise tax penalties on those people who refuse to buy coverage. It isn’t a job I’d be anxious to take on.
