McCain Is the Radical on Health Reform

By John C. Goodman
Wednesday, July 30, 2008

If you listen only to presidential campaign rhetoric, you might conclude that Hillary Clinton and Barack Obama proposed bold new changes for our health-care system, while John McCain is offering only small improvements. If so, you are in for a surprise. Most health-policy analysts believe that Mr. McCain is proposing the most fundamental health-care reform.

Right now the federal government encourages private health insurance primarily through the tax system -- handing out more than $200 billion in tax subsidies every year. Mr. Obama would leave this system largely intact. Mr. McCain would completely replace it with a fairer, more efficient system with a much better chance of insuring the uninsured and controlling health costs at the same time.

Under the current system, every dollar in health-insurance premiums paid by an employer is excluded from employee income and payroll taxes. Take an employee in the 25% income-tax bracket. Throw in state and local income taxes, add the 15.3% (FICA) payroll tax, and the tax exclusion for a middle-income family is worth almost 50 cents on the dollar. To make things a little better, employees can often pay their share of the premium with pretax dollars as well.

But this system is extremely arbitrary. There is virtually no tax relief for people who work for the 40% of employers who do not provide insurance, for part-time workers or people not in the labor market, or for anyone else who for any reason must buy his own insurance. The self-employed get a slightly better deal: They can deduct 100% of their premiums, but they get no relief from the payroll tax.

According to the Lewin Group, a private health-care consulting firm, families earning $100,000 a year get four times as much tax relief as families earning $25,000. In other words, the biggest subsidy goes to those who least need it, and who probably would have purchased insurance anyway.

The system is also wasteful. People can always lower their taxes by spending more on health insurance, and there is no limit to how bloated a health plan can be.

Under the McCain plan, no longer would employers be able to buy insurance with pretax dollars. These payments would be taxable to the employee, just like wages. However, every individual would get a $2,500 credit (and every family would get $5,000) to be applied dollar-for-dollar against taxes owed.

The McCain plan does not raise taxes, nor does it lower them. Instead, it takes the existing system of tax subsidies and treats everyone alike, regardless of income or job status. All health insurance would be sold on a level playing field under the tax law, regardless of how it is purchased.

The impact would be enormous. For the first time, low- and moderate-income families would get just as much tax relief as the very rich when they purchase health insurance. People who must purchase their own insurance would get just as much tax relief as those who obtain it through an employer. Whereas Mr. Obama would continue the current practice of giving the vast bulk of federal help to the rich (through tax subsidies) and the poor (through spending programs), the McCain tax credit would give the most new tax relief to the middle class.

The McCain plan would also encourage all Americans to control costs. The tax credit would subsidize the core insurance that everyone should have. It would not subsidize bells and whistles (marriage counseling, acupuncture, etc.) as the current system does. Since employees and their employers will be paying for additional coverage with aftertax dollars, everyone will have an incentive to compare the value of extra health benefits to the value of other things money can buy. When they eliminate health-care waste, they would get to keep every dollar they save.

The McCain tax credit would be refundable. People could apply $2,500 per person or $5,000 per family to the purchase of health insurance, even if they do not owe any income taxes. Families would not have to wait until April 15 the following year to get their credit. They could obtain the subsidy at the time the insurance is purchased.

The credit would also be transferable. Insurance companies and other intermediaries would be able to help families obtain their credit and apply it directly to health-insurance premiums.

The McCain health plan would allow people to buy insurance across state lines -- thus creating a competitive, national market for health insurance. It would provide additional federal money for people who have been denied coverage because of a pre-existing condition, making it easier for people who have lost their insurance to obtain new coverage. It would also encourage Medicare to become a smarter, more efficient buyer of care.

The McCain plan will not solve all our health-care problems. But it has a far better chance of positively reforming the system than any other plan that has been proposed in this campaign season.