When the Obama campaign hits expected Republican presidential nominee Mitt Romney for being the candidate supporting the rich, they aren’t often talking about health insurance. But they could be.
It is one place where a comparison between Obama and Romney’s health policies can be easily seen. And it fits right in with the narrative the Obama campaign has been weaving: Obama is for the everyman, and Romney is for the rich.
The details on Romney’s plan are vague. His campaign website says he wants to “end the discrimination against the individual purchase of insurance.” Under current law, people who get their insurance through employers pay their premiums tax-free. The 30 million Americans who buy insurance on their own don’t get those same benefits.
Equalizing the tax treatment of health insurance between people covered by their employers and those who buy their own insurance could mean lots of different things. It could mean giving everyone a tax credit for buying health insurance—something Sen. John McCain, R-Ariz., proposed in the 2008 presidential campaign—or it could simply mean extending the same tax exclusion to people who buy insurance individually.
Because Romney’s plan is not detailed, the best information we have to estimate how this would affect average Americans is simply extending the same tax exclusion that people with employer-sponsored insurance get now. It’s an important policy, which could affect up to 80 million Americans who don’t have insurance now or don’t purchase insurance through their employers.
Crunching numbers from the Congressional Budget Office, it becomes clear that the more money you make, the better Romney’s plan is for you. The poorer you are, the better you are getting onto the Affordable Care Act’s insurance exchanges.
That’s because the current tax treatment of health insurance for employer-sponsored insurance gets more valuable as your tax rate increases. The more money you make, the more you are taxed, and the more valuable it is for you to avoid having income taxed at that higher rate.
“What happens if you have a progressive income-tax system, as we do, then your value of it goes up as your income goes up. It’s the reverse of your tax rate,” said Edmund Haislmaier, a senior research fellow at the conservative Heritage Foundation, in an interview. “The idea of a credit—any kind of credit—is delinked from these progressive or regressive steps in the tax code.”
In other words, the credit pays everyone the same amount, regardless of how much money you make or at what rate you are taxed.
CBO estimated that a family of four making $50,000 with employer insurance gets $5,900 in tax breaks on a premium that costs $20,000 over the course of the year. That number includes some state tax breaks, but the large majority comes from the federal tax exclusion. That is nearly 12 percent of their income—a pretty good deal. But Obama’s tax subsidies on the exchange for premiums and other expenses (such as co-pays and deductibles) total $15,800. That is obviously a much better deal, covering more than 31 percent of that person’s income. Obama’s plan is clearly a winner for that income bracket.
But when you flip the numbers, Romney’s plan is better for higher earners. Someone making $99,000 would get a tax break of $7,800 for their individual insurance coverage, or nearly 8 percent of their income. (That also includes benefits from state taxes.) In "Obamacare," they would get a $5,700 subsidy to help them cover their insurance costs, about 6 percent of their income. After that, they would not get any tax breaks on premiums paid to insurance companies.
The gap only gets bigger as incomes increase. People making $124,000 would get a $7,700 tax break on their insurance purchase with Romney’s plan, but would not be eligible for any tax subsidies through the insurance exchanges.
The Obama campaign points out that CBO's analysis assumes the premiums are almost $5,000 cheaper on the exchange, a credit to the law’s ability to bring down insurance costs overall and a fact that will generate thousands in savings for anyone who gets insurance on the exchange. Romney says he would repeal the health care law, but he also has his own proposals, such as selling insurance across state lines, that he argues will also bring down insurance costs overall.
“Governor Romney will eliminate the tax discrimination that forces individuals to pay more for their insurance than businesses, and he will ensure that lower-income Americans receive the assistance they need to get the care they deserve,” said Amanda Henneberg, a Romney campaign spokeswoman.
Romney could choose the same route McCain took in 2008, offering a credit that benefits everyone equally. But that is a perilous political path, as McCain learned, fraught with the difficulty of explaining tax incentives to the public.
It might be easier for Romney to leave the detail for after the election. Until then, all we can do is guess.
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