The Census Bureau estimates there are currently 38.4 million Americans without health insurance coverage. That number is expected to increase dramatically due to the sluggish economy and the rising cost of health insurance. Both President George W. Bush and the Democratic leadership have indicated a commitment to reducing the number of uninsured, and there has been bipartisan interest in using tax credits to subsidize the purchase of private health insurance.

In Cutting Taxes for Insuring (AEI Press, 2002), Mark V. Pauly and Bradley Herring explore the likely impact of specific tax credit options on the uninsured. They estimate that a typical tax credit with a fifty percent subsidy aimed at the twenty million working uninsured would induce ten million of them to buy private health insurance. The study analyzes the effects of a variety of forms of tax credits, especially for workers whose incomes place them above the poverty line but below the median family income--a group that includes the majority of the uninsured. The authors stress that low- and high-income people respond differently to tax subsidies. 

Pauly and Herring found that: 

• A tax credit does not have to provide a full subsidy to be effective in helping low-income workers. 
• A modest tax credit paying 50 percent of the premium would reduce the number of uninsured workers and family members with low incomes by as much as 52 percent.  
• A smaller tax credit offering 33 percent of the health insurance premium would reduce the number of uninsured workers and family members by 20 percent.  
• Most high-income workers would keep their group coverage even if offered a modest credit for individual health insurance. 
• A tax credit covering 33 percent of the premium would cause only 3.5 percent of high-income workers and family members to drop their group insurance. 
• A higher tax credit covering 50 percent of the premium would cause all high-income workers to drop their existing group coverage. The authors point out that this can be easily avoided by legislative language limiting eligibility for the subsidy to those without employer-provided health insurance.
• The impact of a tax credit depends on the design of the subsidy, the extent of other government subsidies, and the cost of private insurance. 
• A fixed-dollar credit would induce more people to buy insurance, but they would tend to be younger and healthier. 
• A tax credit proportional to the health insurance premium would cover fewer people but would tend to provide more insurance coverage for those who are less healthy.
• Tax credits are more effective when Medicaid and other public programs cover less of the cost of health care.
• Tax credits are more effective when the administrative cost of insurance is lower.
• Tax credits for low-income workers would not significantly increase the percentage of GDP devoted to health care. 
• Many of those who would take advantage of a tax credit now receive subsidies through public health programs or tax subsidies for employment-based coverage. A tax credit would substitute for those other federal subsidies and some of the current private sector costs of caring for the uninsured.

Because it is impossible to know precisely the effects of tax policy and the future of insurance markets on policies created to reduce the number of uninsured, the authors prefer plans that take into account a wide range of possible but currently unknowable outcomes. They conclude that a carefully designed tax credit proposal could substantially reduce the number of people without health insurance while improving the equity of the tax treatment of the insured. Offering these credits to low-income people would provide the same kind of favorable tax treatment for health insurance now enjoyed by most higher-income workers. Employees do not pay taxes on the health insurance benefits provided by their employers.

This volume follows the recent publication of Responsible Tax Credits for Health Insurance, by Mark V. Pauly and John S. Hoff (AEI Press, January 2002), which makes the case for a tax credit approach to health insurance and provides a primer for policymakers. 

Mark V. Pauly is a professor of health care systems and economics and the Bendheim Professor at the Wharton School, University of Pennsylvania. Bradley Herring is a Robert Wood Johnson Foundation health policy scholar at the Institution for Social and Policy Studies at Yale University.