20 Aug 2015 Rubio’s Health Care Plan: Economics vs. Politics

It is often the case that good economics makes bad politics, and vice-versa.  That is evident in the part of Senator Marco Rubio’s health care plan that deals with the employer-based tax exclusion for health insurance.

Rubio’s plan proposes a refundable tax credit for purchase of insurance on the individual market.  It also proposes reducing the employer-based tax exclusion gradually over a period of 10 years until its value is equal to that of the tax credit.

John C. Goodman shows why this is a good idea by explaining what is wrong with the current employer-based system:

Under the current system employers can spend an unlimited amount on health insurance with pretax dollars. Wages are taxed. Health insurance is not taxed. So the 150 million people who get their health insurance at work can all lower their taxes by receiving more of their compensation in the form of health insurance instead of wages. For someone in the 40% tax bracket, the ability to buy insurance with pre-tax amounts to a 40% federal tax subsidy. Insurance can be worth no more than 61 cents on the dollar and still look attractive to this employee.

No wonder our system is so wasteful.

With a fixed sum tax credit, we subsidize the core insurance that we want everyone to have and leave employees and their employers free to purchase additional insurance with after-tax dollars. When that occurs, they are unlikely to spend an additional dollar on health insurance unless they get a full dollar’s worth of value.

Goodman likes Rubio’s plan so much he concludes, “My only quibble with Sen. Rubio is that he wants to take 10 years to level the playing field between employer and individual purchase. Ten Years? Let’s do it tomorrow.”

Over at National Review Online, James Capretta is less enthused.  While he acknowledges that Rubio’s plan is “fair” in that people with employer-based insurance and individual insurance would get the same tax break, he warns that, “it is more vulnerable to political attack than the Walker approach because it would create some uncertainty about the continued viability of existing employer plans. For that reason, it seems likely that the Walker approach to tax credits would hold up better over time, especially when the inevitable attacks come from Obamacare’s defenders.”

Economically, Goodman is right.  Getting rid of the employer-based tax exclusion would eliminate a huge inefficiency in our health care system, and the sooner we do it, the better our health care system will be.

Yet making the switch quickly would almost certainly create a substantial backlash.  About 169 million people receive their insurance via their employers, and changing the tax system quickly would likely cause many of them to lose their current insurance.  Doing that would make the consumers who lost their insurance in late 2013 look like a day in the park.

I suspect that’s why Rubio chose to do it gradually over ten years.  Yet that still might not be enough to avoid political problems.  As Capretta notes, there would still be a great deal of uncertainty as to whether people could keep their employer-based health insurance.

Nevertheless, it’s good that Rubio is tackling this issue.

FYI: NCPPR has a spreadsheet listing Rubio’s, Scott Walker’s and a host of other conservative/libertarian plans that lays out how each plan tackles important issues such as tax-treatment of health insurance, pre-existing conditions, and Medicaid.  A glossary is provided here for those not familiar with various health-care policy terms.