We simulated the impact of complete implementation of the SOTU proposals on health insurance take-up and taxes, as well as the impact of each part of the proposal (i.e. tax preferences for premiums, tax preferences for HSA contributions, and the low-income tax credit) if it were separately implemented. This allows a comparison of the total impact of SOTU with the "marginal" impact of each of its parts, and it will indicate whether there are synergies between the different components of SOTU.
In performing these simulations, we made a significant change to the method used in the earlier study to calculate the tax consequences when individuals drop ESI to enroll in tax-subsidized individual HDHPs. In the previous report, we assumed that the only tax effect was the additional cost of the subsidy for individual HDHP policies. For example, under the Administration's 2004 proposal, the number of people opting out of ESI was estimated to increase from 332,249 to 861,387, at an annual tax cost of $1.174 billion. The tax cost of more generous subsidies for HDHP with larger ESI buy-outs could be much larger.
In the new simulations, we extended the analysis to include the "full" tax effects of ESI buy-out.
Specifically, when a person drops ESI the government saves the tax subsidy for the employer-paid portion of their premium, and if the individual had a Section 125 plan the government saves the tax subsidy of their out-of-pocket premium as well. For example, suppose an individual in the 30 % income and employment tax bracket had a family coverage PPO policy that cost $12,000 per year with a 25% employee contribution. The annual tax savings when this person drops ESI is $2,700 if he/she does not have a Section 125 plan and $3,600 if he/she has a Section 125 plan.14 This tax savings must be netted against the tax cost of the subsidy for his/her individual HDHP, possibly resulting in a net tax savings for the government.