Health Insurance Tax Credits: Potential for Expanding Coverage

Tax credits are being touted as possible mechanisms for expanding health insurance coverage in the United States. Analysts,1 members of Congress, and the Bush administration have all developed tax credit proposals in the past few years. However, although tax credit approaches are clearly appealing in certain respects, they are probably not the most effective tools for expanding health insurance coverage. Tax credits for health insurance can be structured in an infinite number of ways. At the core of these proposals is the provision of a specified dollar amount, in the form of decreased tax liability, to those who obtain health insurance. Depending upon its design, the credit may be refundable (i.e., available to those with no or only limited tax liability). Researchers agree that the only way to make significant inroads into solving the problems of the uninsured is through subsidization. The question is not whether coverage reforms should include subsidies, but rather how much subsidization is appropriate, who should receive the subsidies, and how they should be transferred. This brief assesses the promise and shortcomings of tax credits as a health insurance subsidy in light of a single primary objective: increasing health insurance coverage.