McCain’s Mediocre Tax Credit
Misleading promises.


Michael F. Cannon

Until recently, John McCain’s health plan had two features that libertarians and conservatives found appealing. One is his proposal to deregulate health insurance by letting people buy insurance across state lines. The other was his proposed health-insurance tax credit, which would expand choice and competition by leveling the playing field between job-based insurance and coverage that consumers purchase themselves.

Or so we thought. The McCain camp now admits his tax credit would not level that playing field, leaving free-market advocates with even less reason to support an already mediocre proposal.

Congress grants a huge tax break to one particular type of health insurance: Workers pay neither income nor payroll taxes on the value of their employer-purchased health benefits. Workers who purchase coverage themselves (on the “individual” market) generally get no tax breaks.

Why is leveling the playing field important? Economists argue the “tax exclusion” for job-based coverage encourages excessive cost growth, traps workers in bad jobs, and leaves many without coverage when they need it most. It’s also unfair: after taxes, workers who buy on the individual market can pay twice as much for the same or less coverage.

A level playing field would end that inequity. It would also encourage more people to purchase coverage on the individual market, which provides greater choice and often greater financial security to seriously ill enrollees.

Many libertarians and conservatives are hostile to tax credits, yet most support McCain’s proposal. A big reason is that, contrary to Barack Obama’s claims, substituting tax credits for the current exclusion would effectively cut taxes for everyone, because all workers would gain more control over their earnings.

How? If employers no longer hold the keys to the tax break, workers would have the freedom to buy their own coverage and demand cash from their employers rather than health benefits. For workers with family coverage, that would shift an average of $9,000 of compensation from a form workers don’t control (health benefits) to a form they do control (wages). The labor market would force employers to fork that money over.