Minnesota Rep. Michele Bachmann has announced her "bipartisan legislation, H.R. 502, the Health Care Freedom of Choice Act," which
would make medical expenses, including health care premiums, 100% tax-deductible for all individuals. Under current law, health insurance is tax-free for those who receive it through their employers. My bill would give this same tax benefit to people who buy their own health insurance or pay for medical care “out-of-pocket.” This would give all Americans the freedom to purchase the health plan of their choice, to pick their preferred doctors and to make their own medical decisions.
In the buildup to her rollout, the decidedly non-bipartisan Bachmann said, “We are rejecting politics as usual in Washington D.C. in dealing with this health care issue.”
Apparently, proposing tax cuts as the solution to all that ails us is not politics as usual.
I haven't read the bill, but let's examine her description 100% tax deductibility as giving people freedom to purchase the health plan of their choice.
The average American family with employer-subsidized health care coverage (earning about $50,000 in household income) pays out about $7,000 per year in its share of premiums and out-of-pocket costs. Employer contributions average nearly $10,000.
The current federal tax system already allows deductibility of medical expenses. You can deduct the amount of your medical and dental expenses that is more than 7.5% of your AGI [Adjusted Gross Income]. For example, if your AGI is $35,000, 7.5% is $2,625. If your family of four paid medical expenses of $7,000, you could deduct $4,375. Filing as the head of the household, you would pay $3,996 in federal income taxes.
So who really benefits from the Bachmann proposal?
The poor? No. They don't save enough to afford insurance.
Taking the example above, the Bachmann bill would lower the family tax bill by $393 — or about 10 percent. That's about enough to pay for one month's premium on a moderately high deductible insurance policy in Minnesota for that family of four.
Claiming higher levels of expenses does not yield any larger relative savings under the Bachmann plan, because the only difference is the tax that's applied to the family's first $2,625 in expenses under the current system.
The real question for lower income households is whether they can come up with the money at all. They are less likely to be covered by employer plans, and they also have less income available to pay regular premiums and out-of-pocket costs. A tax deduction doesn't help the cash flow for people living paycheck to paycheck.
The middle class? They'd see a modest benefit.The Bachmann proposal would result in an additional $562 in tax savings over the current system — worth a little more than one month's premium for a Medica HSA plan.
The top earners? You won't be surprised.
1. The top 10 percent of earners — at least those who are employed — are generally covered by health insurance. (In 2006, only 8.5% of those earning $75k+ were uninsured, sompared to 21.1% of those earning $25-50k.)
2. The higher the income, the more likely the insured has a Cadillac plan as part of an executive compensation package.
3. Once you reach top 5 percent of earners or so, your own medical expenses cease being deductible under current tax law. For example, at $200,000 AGI, only your expenses above $15,000 would qualify for deduction.
Someone earning $100,000 and paying the average $7,000 for medical expenses would not be able to deduct any of it. Under Bachmann's bill, they could deduct it all, worth $1,680 in tax savings.
The bottom line?
Wealthier tax payers, who are more likely to be well-covered, do better under the tax portion of the Bachmann plan.
A tax-deduction scheme favors those who pay more taxes. Look at it this way. Someone earning $500,000 who had $35,000 in medical expenses could deduct them all and save $12,250 in taxes. Someone earning $35,000 with the same medical costs would simply be bankrupt.
A tax deduction for all also means less revenue, and less revenue means program cuts. No doubt "Health Care Freedom of Choice" would be used to justify cutting public health care expenditures, which primarily benefit low-income people.