Wednesday, January 24, 2007

First Comment on the SOTU

We'll see how this writing business goes all sick. Perhaps the topic of health insurance is an apt one to choose. This is what the president proposed:

Tonight, I propose two new initiatives to help more Americans afford their own insurance. First, I propose a standard tax deduction for health insurance that will be like the standard tax deduction for dependents. Families with health insurance will pay no income or payroll taxes on $15,000 of their income. Single Americans with health insurance will pay no income or payroll taxes on $7,500 of their income. With this reform, more than 100 million men, women, and children who are now covered by employer-provided insurance will benefit from lower tax bills.

At the same time, this reform will level the playing field for those who do not get health insurance through their job. For Americans who now purchase health insurance on their own, my proposal would mean a substantial tax savings — $4,500 for a family of four making $60,000 a year. And for the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach. Changing the tax code is a vital and necessary step to making health care affordable for more Americans.

Let's clarify what this proposal (dead on arrival, by the way, given the new Democratic majority in the Congress) would do. First, it would make health insurance offered by your employer part of your taxable income. Right now health insurance comes out of pre-tax dollars. Then it would give you a deduction for the health insurance part, but the deduction would be a fixed sum. So if you happened to spend exactly one of those stated quantities, depending on your family status, the proposal would have no impact on you at all. Now, if your policy is valued at less than those quantities you would save on taxes. On the other hand, if you are currently getting a policy worth more than the given amounts you would have to pay tax on the difference.

The idea here is to make people buy cheaper policies. But cheaper policies often cover fewer things and have larger deductibles (the amount you have to pay before the insurance kicks in). Which means that a cheaper policy might make you more like those who have no insurance at all. It could also be the case that cheaper policies are just more efficient and therefore cost less. But health care markets suffer from that pesky problem of incomplete information and difficulty in measuring quality, and most health insurance packets which cost less do so because they ultimately offer either less coverage (cut out mental health care, for example), refuse high-risk consumers (such as the chronically ill) or have much higher deductibles.

So much for the case of those already covered. What if your employer doesn't offer health insurance at all? Here the proposal could make a difference, because a poor worker could now buy health insurance and get a nice deduction, right? Except for two problems: First, many poor workers either pay no federal income tax or very low income taxes. The value of the tax deductible for them is close to zero. Second, the individual policies available for purchase outside employer-based group plans are much more expensive, and most poor wage-earners can't afford the kind of policy that would cover their family needs.

The whole proposal stinks, pretty much. As another complication, consider what happens when the average health insurance price tag keeps on rising at the rapid rate it has recently. Unless these tax deductible limits are raised as frequently, more and more people will find themselves paying a higher price on their insurance policies in the sense of higher taxes.