B April 21, The Honorable Charles B. Rangel Ranking Minority Member Committee on Ways and Means House of Representatives

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1 Unit Stats Gnral Accounting Offic Washington, DC Halth, Eucation, an Human Srvics Division B April 21, 2000 Th Honorabl Charls B. Rangl Ranking Minority Mmbr Committ on Ways an Mans Hous of Rprsntativs Subjct: Privat Halth Insuranc: Potntial Tax Bnfit of a Halth Insuranc Duction Propos in H.R Dar Mr. Rangl: Dspit a strong conomy, th numbr of nonlrly Amricans without halth insuranc incras from about 39 million in 1994 to narly 44 million in 1998, th latst yar for which comprhnsiv ata ar availabl. A numbr of lgislativ proposals focus on rucing th numbr of uninsur an on arssing concrns about th quity of tax law as it rlats to halth insuranc. Som of ths proposals woul xpan th tax avantags associat with iniviually purchas halth insuranc by allowing iniviuals who buy halth insuranc ithr to rciv a tax crit that rucs th amount of taxs thy ow or to uct th prmiums thy pay from thir taxabl incom. Prviously, w rport that tax crits an uctions iffr with rspct to who woul b ligibl an th amount of tax subsiy iniviuals woul rciv. 1 A tax crit typically rsults in th sam tax bnfit rgarlss of marginal tax rat, although th crit may b availabl only for iniviuals blow a crtain lvl of taxabl incom. In contrast, th valu of a tax uction is irctly proportionat to marginal tax rats, so that iniviuals in highr tax brackts rciv a largr tax avantag than thos in lowr tax brackts. This lttr rspons to your rqust for information on th potntial tax bnfit that iniviuals coul rciv if a tax 1 S Privat Halth Insuranc: Estimats of Expan Tax Ductibility of Prmiums for Iniviually Purchas Halth Insuranc (GAO/HEHS R, Jun 10, 1998); Privat Halth Insuranc: Estimats of a Propos Halth Insuranc Tax Crit for Thos Who Buy Iniviual Halth Insuranc (GAO/HEHS R, July 22, 1998); an Privat Halth Insuranc: Estimats of Effcts of Halth Insuranc Tax Crits an Ductions as Propos in H.R (GAO/HEHS R, Spt. 13, 1999). GAO/HEHS R Propos Halth Insuranc Tax Duction

2 uction wr availabl as propos in H.R In particular, you ask that w stimat both th numbr of popl who woul potntially b ligibl for a tax uction unr this proposal an th potntial valu of such a uction. Currnt tax law allows mployrs to uct from thir taxabl incom th contributions thy mak to thir mploys halth insuranc prmiums an xclus ths contributions from th mploys taxabl incom. Slf-mploy iniviuals may uct 60 prcnt of halth insuranc xpnss if thy ar not ligibl to participat in an mployr-subsiiz halth plan. 3 In aition, any iniviual may claim an itmiz uction for halth insuranc prmiums to th xtnt that thy an all othr mical xpnss xc 7.5 prcnt of ajust gross incom. In summary, w stimat th following outcoms ha H.R bn th law in 1998: About 39 million popl coul potntially hav bnfit from th propos tax uction: thos who wr uninsur an thn ci to purchas covrag, thos who ha iniviual insuranc, an thos who ha mployr-sponsor insuranc with no mployr subsiization. Anothr 22 million potntially ligibl iniviuals coul not hav bnfit from th propos uction ithr bcaus thy wr in th 0-prcnt tax brackt or bcaus thy i not fil fral incom taxs in Most of thos who coul hav bnfit from th propos uction narly 31 million wr in th 15-prcnt tax brackt an, at most, coul hav rciv a 15-prcnt ruction in prmiums. Morovr, bcaus th uctibl portion of th prmium woul hav bn phas in ovr a 6-yar prio, th actual ruction in prmiums coul hav bn significantly lowr until tax yar W cannot stimat th prcntag of popl who might hav purchas halth insuranc as a rsult of th propos uction. Iniviuals whos mployrs pai on-half or lss of th total prmium for thir insuranc coul also hav bnfit from th uction. Th numbr of such iniviuals, howvr, is not availabl. An stimat 76 million popl ha insuranc that was partially subsiiz by an mployr, although only a small fraction of ths iniviuals woul hav bn likly to bnfit from th propos uction bcaus most mployrs who sponsor halth insuranc pay mor than half of th total prmium. 2 H.R was pass by th Hous on Octobr 6, Th portion of ths xpnss that ar uctibl will incras until it is 100 prcnt in GAO/HEHS R Propos Halth Insuranc Tax Duction

3 KEY FEATURES OF H.R Th tax uction propos unr H.R woul b availabl to popl who purchas iniviual halth insuranc or who pai 50 prcnt or mor of th total prmium for mployr-sponsor insuranc. Th uction woul apply only to th purchas of major mical insuranc an not to th purchas of supplmntal policis, such as ntal or vision-only plans. This uction woul b us in trmining ajust gross incom, so that th tax filr woul not n to itmiz uctions to obtain it. Also, th tax filr woul not n to mt th currnt thrshol of 7.5 prcnt of ajust gross incom for mical xpnss to uct halth insuranc prmiums. Th propos uction woul b phas in ovr a 6-yar prio, with 25 prcnt of th prmium bing uctibl in tax yars 2002 through 2004, an 100 prcnt bing uctibl bginning in tax yar 2007 (s tabl 1). For slf-mploy iniviuals purchasing halth insuranc, H.R woul allow th 100-prcnt uction of halth insuranc prmiums starting in 2001 rathr than in 2003, as is th cas unr currnt law. Tabl 1: Prcntag of Prmium That Woul B Ductibl, by Tax Yar Tax yar(s) Prcntag uctibl 2002, 2003, an latr 100 SCOPE AND METHODOLOGY To trmin th potntial tax bnfit of th uction propos in H.R. 2990, w (1) analyz th U.S. Burau of th Cnsus 1999 Currnt Population Survy (CPS) March Supplmnt for information on thos potntially ligibl for th uction, incluing thir typ of halth insuranc, incom, an tax status; 4 (2) obtain ata from th KPMG 1998 Annual Survy of Employr-Sponsor Halth Bnfits to stimat mployr prmium contributions; an (3) collct ata on singl an family halth insuranc prmiums availabl in th iniviual markt in Although th Burau of th Cnsus os not irctly collct information on ajust gross incom an fral tax paymnts, it rivs stimats from simulations bas on CPS ata, statistical summaris of iniviual incom tax rturns compil by th Intrnal Rvnu Srvic, an ata from th Amrican Housing Survy a survy conuct by th Burau of th Cnsus unr sponsorship of th U. S. Dpartmnt of Housing an Urban Dvlopmnt. 4 Th 1999 CPS March Supplmnt, a survy of about 47,000 houshols, provis ata on th charactristics of th civilian noninstitutionaliz population of th Unit Stats in GAO/HEHS R Propos Halth Insuranc Tax Duction

4 Our stimats rflct th numbr of popl that coul potntially b ligibl for th tax uction unr H.R. 2990, which is likly to b highr than th numbr who woul actually purchas covrag an thus rciv th tax subsiy. In particular, low-incom, uninsur iniviuals coul fin halth insuranc ifficult to affor vn with a tax subsiy. Our stimats also inclu pnnts as wll as tax filrs in th total numbr of iniviuals who coul potntially bnfit from th propos uction an, in th cas of a coupl or family, ar bas on th assumption that on policy woul covr all family mmbrs an pnnts within a houshol. Howvr, our stimats o not inclu iniviuals whos mployr pai som, but lss than half, of thir prmium. Whil such popl woul also b ligibl for th propos uction, availabl ata o not prmit an accurat stimat of this population. Our stimats rflct only thos iniviuals who wr uninsur, who purchas halth insuranc in th iniviual markt, or who ha mployr-sponsor covrag but pai th ntir prmium thmslvs. W i not xamin th ffct of th propos uction on mployr sponsorship of halth insuranc, mployr contributions for halth insuranc, or mploy slction of mployr-sponsor covrag. Nithr i w xamin th ffct of th proposal on fral rvnus. W conuct our work in April 2000 in accoranc with gnrally accpt govrnmnt auiting stanars. 39 MILLION ELIGIBLES COULD HAVE BENEFITED IN 1998, BUT 22 MILLION COULD NOT Unr H.R. 2990, a tax uction woul b availabl to iniviuals with iniviual insuranc or mployr-sponsor insuranc for which th mployr subsiiz on-half or lss of th prmium. Excluing thos with halth insuranc that was, in part, subsiiz by an mployr, in 1998 about 39 million popl coul potntially hav bnfit from this uction if thy purchas or rtain halth insuranc. 5 Anothr 22 million potntially ligibl iniviuals coul not hav bnfit from th propos uction about 15 million iniviuals who wr in th 0-prcnt tax brackt an 7 million iniviuals who i not fil fral incom taxs in Of th 39 million popl who coul hav bnfit from th uction, about two-thirs wr uninsur an woul hav rciv th tax subsiy only if thy ha lct to purchas halth insuranc. Th othr on-thir, incluing about 9 million who ha purchas policis in th iniviual markt an 5 million who ha mployr-sponsor covrag with no mployr subsiy, woul hav rciv a tax subsiy for halth insuranc thy wr alray purchasing. As shown in figur 1, most of th popl who coul potntially hav bnfit from 5 About 2 million of ths iniviuals coul alray hav qualifi for th halth insuranc uction that is availabl to slf-mploy iniviuals. 4 GAO/HEHS R Propos Halth Insuranc Tax Duction

5 th propos uction narly 31 million wr in th 15-prcnt tax brackt, 6 an about 15 million coul not hav bnfit from th uction bcaus thy wr in th 0-prcnt tax brackt. Figur 1: Numbr of Iniviuals Who Coul Potntially Hav Bnfit in 1998 From th Propos Tax Duction, by Insuranc Status an Marginal Tax Brackt Numbr of Popl (in Millions) Employr-Sponsor, No Subsiy Iniviually Insur Uninsur Marginal Tax Brackt (Prcntag) Not: Figur 1 xclus iniviuals with mployr-sponsor covrag whos mployr subsiiz a portion of thir prmiums. MOST EMPLOYERS SPONSORING COVERAGE PAY MORE THAN HALF OF PREMIUMS An unknown, though likly small, numbr of iniviuals whos mployrs pai half or lss of th prmium cost woul also hav bn ligibl for th uction in That yar, about 76 million iniviuals ha both halth insuranc that was partially subsiiz by an mployr an sufficint incom for a tax uction. Most of ths popl woul not hav bn ligibl for th propos uction, howvr, bcaus most mployrs sponsoring halth insuranc pay 6 In 1998, th 15-prcnt tax brackt inclu taxabl incoms of $25,350 or lss for singl tax filrs, $33,950 for ha-of-houshol tax filrs, an $42,350 for joint tax filrs. 5 GAO/HEHS R Propos Halth Insuranc Tax Duction

6 mor than on-half of th total prmium. 7 Only about 16.5 prcnt of mployrs sponsoring singl covrag pai lss than on-half of th total prmium; 43.5 prcnt pai lss than on-half of th prmium for family covrag. 8 Most of th mployrs that pai lss than half of prmiums wr small firms with fwr than 25 mploys; hnc, a rlativly small portion of iniviuals with mployrsponsor covrag woul hav bn affct. Whil most mployrs that sponsor halth insuranc pay most of th prmium, som kins of mployrs ar lss likly to o so than othrs. In aition to small mployrs, mployrs in th construction, high-tchnology, an rtail inustris rprsnt th largst portion of firms paying 50 prcnt or lss of halth insuranc prmiums. Consquntly, popl who rciv covrag through ths kins of firms ar among thos most likly to bnfit from th propos tax uction. TAX BENEFIT INCREASES WITH MARGINAL TAX RATE Th valu of a tax uction incrass rlativ to a prson s marginal tax brackt. Thus, if th uction propos unr H.R was fully phas in, an ligibl singl tax filr in th 15-prcnt brackt who pai $2,658 9 in prmiums coul rciv a tax subsiy of about $399 from a uction, rsulting in a nt cost of about $2,259 for covrag. 10 Th potntial uction for this sam covrag woul b highr, howvr, for somon in a highr tax brackt. For xampl, an iniviual who was in th highst tax brackt th 39.6-prcnt brackt an ha purchas this sam policy coul hav a tax bnfit of $1,053, rsulting in a nt cost of $1,605 for this covrag. 11 (S nclosurs for mor information on th stimat ffcts of H.R s tax uction on 1998 taxpayrs.) 7 Th CPS os not inicat th xact prcntag of halth insuranc prmiums subsiiz by mployrs, but only whthr thy pay all, som, or non of thos prmiums. Consquntly, w coul not stimat how many popl with partial mployr subsiis coul actually bnfit from th propos uction. 8 Rsults ar riv from a spcial analysis of th KPMG 1998 Annual Survy of Employr-Sponsor Halth Bnfits. 9 This amount rprsnts a 1998 prmium in th iniviual markt for a point-ofsrvic plan for a singl prson that is availabl in a rural county of Nw York. 10 W can not stimat th prcntag of popl who woul purchas halth insuranc as a rsult of th propos uction. 11 In 1998, th 39.6-prcnt tax brackt inclu taxabl incoms of $278,451 or mor but rprsnt only a small portion of thos potntially ligibl for th propos uction. 6 GAO/HEHS R Propos Halth Insuranc Tax Duction

7 Th valu of th uction propos unr H.R woul b vn mor limit until 2007, whn prmiums woul b fully uctibl. For xampl, in th first 3 tax yars, only 25 prcnt of pai prmiums coul b consir for uction. Hnc, a singl tax filr in th 15-prcnt brackt who pai $2,658 in prmiums coul rciv a tax subsiy of about $100. An iniviual in th highst tax brackt who pai this amount in prmiums coul rciv a subsiy of about $ As agr with your offic, unlss you publicly announc its contnts arlir, w plan no furthr istribution of this corrsponnc until 30 ays aftr its issu at. At that tim, w will mak copis availabl to intrst partis on rqust. If you hav any furthr qustions rgaring this lttr, or if w can b of furthr assistanc, plas call m at (202) or John Dickn at (202) Staff who ma major contributions to this lttr inclu Mark Vinkns an Paula Bonin. Sincrly yours, Kathryn G. Alln Associat Dirctor, Halth Financing an Public Halth Issus Enclosurs 2 7 GAO/HEHS R Propos Halth Insuranc Tax Duction

8 ENCLOSURE I ENCLOSURE I ESTIMATES OF INDIVIDUAL HEALTH INSURANCE PREMIUM DEDUCTIONS FOR SINGLE TAX FILERS, 1998 Taxabl incom Marginal tax brackt $0 0% Low: $744 Mium: $2,658 $1 $25,350 $25,351 $61,400 $61,401 $128,100 $128,101 $278,450 Cost of iniviual Nt insuranc cost aftr halth insuranc b uction a At 25- At 100- prcnt prcnt uctibl uctibl 15.0% Low: $744 Mium: $2, % Low: $744 Mium: $2, % Low: $744 Mium: $2, % Low: $744 Mium: $2,658 $278, % Low: $744 Mium: $2,658 $716 $2,558 $6,886 $692 $2,471 $6,653 $686 $2,452 $6,600 $677 $2,418 $6,510 $670 $2,394 $6,446 $632 $2,259 $6,081 $536 $1,913 $5,151 $513 $1,834 $4,936 $476 $1,701 $4,579 $449 $1,605 $4,321 Estimat numbr of nonlrly who wr uninsur, wr iniviually insur, or ha mployrsponsor insuranc but no subsiy (in millions) c a If H.R bcoms law, th uction will b phas in ovr a 6-yar prio, bginning at 25 prcnt in tax yars 2002 through 2004 an thn incrasing to 35 prcnt in 2005, 65 prcnt in 2006, an 100 prcnt in b Th low, mium, an high prmium stimats rprsnt th variation in iniviual halth insuranc prmiums that xist nationally in Ths prmiums ar xampls of actual iniviual (as oppos to group) insuranc prmiums. Th low prmium rprsnts an Arizona prfrr provir organization s 1998 prmium for a singl halthy mal unr ag 30 purchasing a $500-uctibl plan. Th mium prmium rprsnts a 1998 prmium for a point-of-srvic plan for a singl prson that is availabl in a rural county of Nw York. Th high prmium rprsnts a 1998 prmium for an urban Illinois f-forsrvic plan with a $250 uctibl for a singl mal smokr ag 60 to 64. c Most iniviuals with mployr-sponsor covrag with th mployr paying som, but not all, of th covrag woul not hav bn ligibl for a uction, 8 GAO/HEHS R Propos Halth Insuranc Tax Duction

9 ENCLOSURE I ENCLOSURE I bcaus ovr 80 prcnt of mployrs that sponsor halth insuranc for singls also pai mor than 50 prcnt of th prmiums. Not applicabl bcaus iniviuals in th 0-prcnt marginal tax brackt woul not hav rciv a tax subsiy an thrfor woul hav pai th full cost of thir halth insuranc. Th stimat numbr was lss than 75,000 too small to b rliabl, accoring to th CPS. Sourcs: GAO analysis of March 1999 CPS ata an Burau of th Cnsus stimats of taxabl incom. 9 GAO/HEHS R Propos Halth Insuranc Tax Duction

10 ENCLOSURE II ENCLOSURE II ESTIMATES OF INDIVIDUAL HEALTH INSURANCE PREMIUM DEDUCTIONS FOR HEAD-OF-HOUSEHOLD AND JOINT TAX FILERS AND THEIR DEPENDENTS, 1998 Taxabl incom for joint tax filrs b Marginal tax brackt Cost of iniviual halth insuranc c At 25- prcnt uctibl $0 0% Low: $3,180 Mium: $7,352 $1 $42, % Low: $3,180 Mium: $7,352 $42,351 $102,300 $102,301- $155,950 $155,951- $278, % Low: $3,180 Mium: $7, % Low: $3,180 Mium: $7, % Low: $3,180 Mium: $7,352 $278, % Low: $3,180 Mium: $7,352 Nt insuranc cost aftr uction a $3,061 $7,076 $13,699 $2,957 $6,837 $13,237 $2,934 $6,782 $13,130 $2,894 $6,690 $12,952 $2,865 $6,624 $12,824 At 100- prcnt uctibl $2,703 $6,249 $12,098 $2,290 $5,293 $10,248 $2,194 $5,073 $9,821 $2,035 $4,705 $9,109 $1,921 $4,440 $8,597 Estimat numbr of nonlrly who wr uninsur, wr iniviually insur, or ha mployrsponsor insuranc but no subsiy (in millions) a If H.R bcoms law, th uction will b phas in ovr a 6-yar prio, bginning at 25 prcnt in tax yars 2002 through 2004 an thn incrasing to 35 prcnt in 2005, 65 prcnt in 2006, an 100 prcnt in b Th incom brackts associat with th marginal tax rat catgoris for haof-houshol tax filrs in 1998 wr lowr than for joint tax filrs as follows: 15- prcnt marginal tax rat for taxabl incom: from $1 to $33,950; 28-prcnt marginal tax: $33,951 to $87,700; 31-prcnt marginal tax: $87,701 to $142,000; 36- prcnt marginal tax: $142,001 to $278,450; an 39.6-prcnt marginal tax for incom xcing $278,450. C Th low, mium, an high prmium stimats rprsnt th variation in iniviual halth insuranc prmiums that xist nationally in Ths prmiums ar xampls of actual iniviual (as oppos to group) insuranc prmiums availabl for a family of four. Th low prmium rprsnts an Arizona prfrr provir organization s 1998 prmium for a $500-uctibl plan for two parnts unr 30 yars ol. Th mium prmium rprsnts a 1998 family 10 GAO/HEHS R Propos Halth Insuranc Tax Duction

11 ENCLOSURE II ENCLOSURE II prmium for a point-of-srvic plan availabl in a rural county of Nw York. Th high prmium rprsnts a 1998 prmium for an urban Illinois f-for-srvic plan with a $250 uctibl for two parnts ag 60 to 64 with a fathr who was a smokr. Most iniviuals with mployr-sponsor covrag with th mployr paying som, but not all, of th covrag woul not hav bn ligibl for a uction, bcaus ovr 90 prcnt of mployrs that sponsor singl plus on pnnt covrag also pai mor than 50 prcnt of th prmiums. Mor than 50 prcnt of mployrs that sponsor family covrag also pai mor than 50 prcnt of th prmiums. Not applicabl bcaus iniviuals in th 0-prcnt marginal tax brackt woul not hav rciv a tax subsiy an thrfor woul hav pai th full cost of thir halth insuranc. Sourcs: GAO analysis of March 1999 CPS ata an Burau of th Cnsus stimats of taxabl incom. (201058) 11 GAO/HEHS R Propos Halth Insuranc Tax Duction