Buried within most of the variants of President Obama’s proposal for extending health care to 47 million uninsured Americans is the notion that tax credits will somehow provide the financing. Tax credits have become popular with politicians in recent years because they look, superficially, revenue neutral. They are not.  A tax credit is money the Treasury never receives, which otherwise would have gone into the government’s general operating fund. If that operating fund could not have underwritten a given subsidy after tax collection, it will experience a budgetary shortfall if it never receives the taxes in the first place. There are some administrative savings in the tax credit system, and psychological advantages since a tax credit doesn’t feel like a handout, but the bottom line is, that a tax credit that affects large numbers of people will require either increased taxes elsewhere in the system, curtailing services, or adding to a mounting deficit.

A few tax credits – the earned income credit, child credit, and some benefits for people with disabilities – are refundable, meaning the individual gets a check from the IRS even if there is no tax liability. Others, such as weatherization credits, are limited to tax liability.

Upwards of forty million American households have no Federal tax liability at all and many more pay less than $1000 annually. To be of any benefit to them, a tax credit to offset medical insurance costs would need to be refundable, and would create a significant drain on the IRS revenue stream.

The majority of those currently uninsured cannot afford to pay anything close to the full cost of health insurance. Many also have barriers (age, pre-existing conditions) to obtaining private health insurance, but if these are removed by law, the real cost of providing insurance will rise, and it is unlikely that savings in administrative costs will offset this.

What sort of public costs are we looking at? If, on the average, each of the 47 million requires $1000 in subsidies, the cost would be 47 billion.  If as many as 47 million required full subsidy of closer to $10,000 a year (a conservative estimate for an older adult with no major chronic health problems) the cost would be $470 billion.

It is a reasonable assumption that most of the currently uninsured are at or below median income and will not be able to pay much, if anything, out of pocket for private medical insurance, or, for that matter, to pay the full cost of a public option that provided comparable benefits and relied on our private health-care delivery system. To put this in perspective, the IRS considers that a median-income family of four in Oregon’s larger metropolitan areas, living a frugal lifestyle, has no discretionary income from which to pay back taxes owed. In the same area, a single person working full time at minimum wage cannot afford both a vehicle and a self-contained apartment. These budgets assume the person has an employer-subsidized health plan, has no chronic health problems, and is not saddled with ongoing debt obligations. 

The percentage of people covered by workplace health insurance and the quality of coverage for those who remain covered has been declining in recent years.  Broadening the scope of laws requiring employers to provide health insurance has not improved the numbers but has rather encouraged employers to shed older full-time employees in favor of part-time, temporary, and contract labor. It would be unrealistic to suppose that the Obama plan, with or without a public option, will not result in an increase in the numbers of people who would lack insurance in the absence of government subsidies. For example, hard-pressed states could decide to economize on health benefits for public employees if the Federal government was there to pick up the tab. 

By running the model with a few reasonable assumptions – that most of the currently insured would need near full subsidies, that net costs per person insured are unlikely to fall, and that the numbers of people lacking full employer coverage could easily double, one arrives at a price tag of something like a trillion dollars.  Without a massive overhaul of our tax system such an outflow would have been a strain on the budget in more favorable economic times and would be devastating today.

There is an additional problem with subsidies that take the form of tax credits, refundable or otherwise. Tax refunds are vulnerable to interception or seizure by creditors.  State and Federal laws protect refunds and credits to some extent, but it is unlikely