Friday, November 4, 2011

Health Insurance Deductibility

Another article I couldn't sell, so you all get it.

More Ways the Government Makes Health Insurance Unaffordable For the Poor

In a previous article, I pointed to a federal government requirement that employers pay at least half the cost of group health insurance—or they cannot offer it at all.  This primarily injures employees who are poorly paid, or who are part-time, because group health insurance is often less expensive than individual health insurance.  Even worse: an employer that would like to make some contribution, but which cannot afford to pay at least half the cost of group coverage, now cannot help its employees at all.  You could almost get the impression that the government does not want low-paid workers to get group health insurance—except from the government.

There is another method by which the government plays favorites: deductibility of health insurance.  For an employer, the cost of group health insurance is a deductible business expense.  If you are self-employed, and your net profit exceeds the costs of health insurance premiums for yourself, spouse, and dependents, you are also allowed to treat health insurance premiums as a deductible business expense.  

But what if you are an employee of a company that has no health insurance plan, or you are not eligible to participate in that plan because you are part-time?  Good ole Uncle Sam is not completely unfeeling: you are allowed to deduct on Schedule A your medical expenses, including health insurance premiums that exceed 7.5% of your adjusted gross income.  If you are one of the many Americans who have a part-time job, or even a full-time job at low wages, this turns out to be nearly worthless.  

Let’s say you work for $9 per hour (a pretty common low-skill rate of pay).  Even if you work full-time, forty hours a week, that is $18,720 per year.  If your spouse has a similar job, the two of you are grossing $37,440 per year.  (Unfortunately, for a lot of Americans, this is actually a rather generous set of assumptions: both of you working full-time, for example.)  If you buy individual health insurance for your family, this is going to easily cost $4200 per year.  You get to deduct this amount, minus $2808 (7.5% of your adjusted gross income) from your income when calculating taxes…but because you are in a 15% marginal federal income tax bracket, it only reduces your federal income taxes by $208.80—an amount so small that it will make little or no difference in affordability for health insurance.  Oh, one little detail: unless you are making sizable house mortgage payments, or student loan payments (neither real likely in this income range), you are not going to be filing Schedule A, anyway, because the standard deduction is far above that level.

A business, or a person who is self-employed, gets to the deduct the entire cost of health insurance from net profit—but a person who works for a business without a health insurance plan gets penalized by the “exceeds 7.5% of AGI” rule.  I won’t claim that eliminating the 7.5% of AGI rule is going to make a big difference for the working poor; even without it, our couple above only reduces their federal income tax by $630 per year, instead of $208.80—and that assumes that they are filing Schedule A, which is not likely.  For most of the working poor, this is not going to make enough difference to allow them to buy health insurance.  But for some of the working poor, the ones who are making a bit more than $9 per hour, it may make it possible for them to purchase health insurance.  If even 5% or 10% of the uninsured could buy their own coverage, instead of being dependent on governmental assistance, would this not be a good thing?

Pretty obviously, the big problem is that the working poor do not make enough money to pay for their health insurance.  This is why both President Bush and John McCain in his 2008 campaign argued for a health insurance tax credit that would be financed by taxing employer-provided health insurance plans where the cost exceeded that health insurance tax credit amount.  Libertarian purists were not particularly thrilled, because it was still a net redistribution of wealth—but compared to Obamacare’s Rube Goldberg scheme, it was certainly less destructive to the idea of free markets.  I also think that we are all better off if the working poor see the solution to their problems being a hand helping to lift them up, not a handout that leaves them permanently dependent.

What amazes me is how little effort Republicans running for office have spent on promoting at least eliminating the 7.5% AGI requirement, if not arguing for some health insurance tax credit for the working poor that would give them at least a bit of a hand up—instead of the 7.5% AGI kick in the face.  Are Republicans interested in taking hard working poor people away from the Democratic Party?  At times you have to wonder.
Clayton E. Cramer teaches history at College of Western Idaho, and works as a software engineer for the State of Idaho.

1 comment:

  1. Pretty much why I say that all "Tax Credits" are bogus. I seem to recall one about being able to deduct $10,000 in education expenses, but for the ones it was supposedly going to benefit, well, multiply that by the tax rate, as well as the fact that if you're making $30 grand a year you can't afford to spend that kind of scratch, and it's worthless.