The federal government's primary approach to helping the middle-class access healthcare is through the tax code. Most importantly, employers can deduct funds used to provide health insurance to employees, who generally exclude the benefits from income. This is not the most rational or comprehensive approach but has helped middle-class people obtain health insurance.

The deduction for employer-provided health insurance is projected by the Congressional Joint Committee on Taxation to cost the federal government $534 billion from 2006 through 2010. Deductions for health insurance premiums available to the self-employed will cost another $22.6 billion between 2006 and 2010. While many middle-class families have obtained health insurance through this route, there are many ways in which it may not be an efficient or equitable policy. For one thing, the tax benefit is greatest for those in the highest income brackets and lowest for those in the lowest income brackets, making it an undeniably regressive policy. Also, it does nothing for the estimated 45 million Americans lacking health insurance. The rising high cost of health care has caused many employers, particularly small businesses, to decide to not provide health insurance to their workers, despite the tax break that would benefit the employees.

White House Proposal Could Make Matters Worse

President Bush argues that his health care tax proposal would remedy this situation. He would eliminate the deduction for employer-provided health insurance and instead offer a deduction for health insurance purchased on the individual market (for the purchase of coverage that is not employer-provided) The reality is that his plan could weaken employer-provided health insurance without ensuring that an adequate alternative takes its place. The President's proposal would basically make the tax code biased towards individually purchased health care and even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance. The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

A recent summary of research from the Center on Budget and Policy Priorities notes studies showing that most low-income people trying to obtain coverage on the individual health insurance market have difficulty and over a quarter are denied coverage or are charged much more because of a pre-existing condition. The types of coverage available on the individual market often result in greater out-of-pocket expenses that will cause some low-income people to forego necessary health treatments.

Public Programs Like SCHIP More Efficient than Tax Subsidies - Yet Face Presidential Veto

The President has claimed his proposal would be more efficient than the House and Senate bills to expand the State Children's Health Insurance Program (SCHIP), which the two chambers approved this week. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care under either bill would be those who would otherwise not have health insurance. Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal, and that the majority of benefits from the President's health care proposals go to those who would have health insurance anyway.

On August 2, the Senate passed its SCHIP bill, which increases the federal cigarette tax by 61 cents to one dollar per pack to offset the costs. The House passed its broader bill, which increases the federal cigarette tax by 45 cents per pack and includes other revenue-raising provisions, on August 1. The President has indicated that he would veto either version.

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