Tax Options for Financing Health Care Reform Page: 9 of 18
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Tax Options for Financing Health Care Reform
under the previous approaches discussed). This approach would also raise revenues and
discourage excessively generous health insurance packages. Explicit issues of assignment of
benefits to individual employees would not arise, although there would still be issues of equity
Other Health-Related Tax Expenditures
Other health-related income tax expenditures might be considered and are listed in the Senate
Finance Committee's report.'7 The second largest tax expenditure is the revenue loss from
excluding Medicare benefits from income for tax purposes, estimated by the JCT at $40.6 billion.
Altering this provision would involve significant administrative problems and has not been
included in the options. Similarly, the exclusion of medical benefits for military dependents and
military retirees ($3.3 billion) is not included.
Restricting Itemized Deductions for Medical Expenses
Individuals are allowed an itemized deduction for medical expenses above 7.5% of adjusted gross
income. JCT estimates the cost at $10.7 billion per year. The provision, with a significant floor, is
aimed at taxpayers who have large medical costs relative to income. It may be more frequently
used by those without insurance or for uncovered costs for those with insurance (such as mental
health care, dental care, and long term care). It is claimed by about 12 million taxpayers, or about
9% of tax returns. In part because of the percentage-of-income floor, the medical expense
deduction tends to be relatively more beneficial to middle class taxpayers than other itemized
deductions. According to IRS statistics for 2006, 50% of total itemized deductions are claimed by
those with $100,000 or more of income, while only 15% of the medical expense deduction is
claimed by these higher income groups. Similarly, while 26% of all itemized deductions are
claimed by those with incomes in excess of $200,000, less than 4% of the medical expense
deductions are claimed by these groups. Although the deduction may encourage individuals to
forego insurance and has an uneven subsidy effect depending on the tax rate of the individual, an
argument for retaining the deduction is that individuals with extraordinary medical expenditures
are less able to pay.
Special Benefits for Blue Cross
Blue Cross and Blue Shield, along with a few other companies that existed in 1986 and were tax
exempt, are eligible for a special deduction of 25% of claims and expenses in excess of surplus (a
measure of profit). They are also provided an exception from a rule that approximates the taxation
of unearned premiums (premiums that are due under contracts but not received). The revenue loss
from this provision is small, about $1 billion a year. These provisions were substituted in 1986 for
a general tax exemption that arose (in turn) from the perception that these organizations were
17 A list is presented in the Senate Finance Committee's options paper. Data on cost and distribution are also found in
Joint Committee on Taxation, Background Materials for Senate Committee on Finance Roundtable on Health Care
Financing, JCX-27-09, May 8. 2009. For a discussion of individual tax expenditures, see United States Senate
Committee on the Budget, Tax Expenditures: Compendium of Background Material on Individual Provisions, Prepared
by the Congressional Research Service, December 2008, http://frwebgate.access.gpo.gov/cgi-
Congressional Research Service
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Tax Options for Financing Health Care Reform, report, June 19, 2009; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc809116/m1/9/: accessed December 10, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.