We also estimated the cost and coverage impacts of a Congressional tax credit proposal, which was modeled after Senate bill S.1019. This proposal would replace the current tax exclusion for ESI with a flat-tax credit of $2,000 per adult and $500 per child with a maximum of 2 children.
A key assumption in this analysis is that the tax credit, as well as the deduction explained in the previous section, would be “advanceable” through the withholding system so that people can get the subsidy as they pay their premiums rather than waiting until taxes are filed in the following year. This means that people would be permitted to adjust their income tax withholding to reflect these tax subsidies, much as people now do when they purchase a home.
Because the tax credit is “refundable,” (i.e., the credit can exceed the amount of taxes owed) we assume that workers can obtain advance payments through withholding. Thus, low-income people could have an amount added to their check each month as an advance for the tax credit amount. We assume that non-workers would be able to apply separately for advance payments of the tax credit.
Key findings on the impact of the Congressional tax credit proposal include:
- The proposal would reduce the number of uninsured by about 21.1 million people (43 percent);
- Replacing the existing tax exclusion with the tax credit would increase the federal deficit by approximately $36.1 billion in 2009 assuming the program was fully phased-in;
- The initial increase in the deficit would decline to a net reduction in the deficit of $171.6 billion in 2018. This is because the tax credit is indexed with the growth in the Gross Domestic Product (GDP), which grows at about 2.2 percent per year, while the tax exclusion that it replaces would be expected to grow with health care cost inflation at about 7.0 percent per year; and
- The Federal impact of the program over the 2009 to 2018 period is estimated to be a net savings of $564.4 billion.
When comparing the impact of the President’s proposal to the Congressional proposal, there is a greater reduction of the uninsured and lower costs under the Congressional option. More discussion of the impacts of the two proposals will be given following the methodology section below.