General Question

Judi's avatar

Taxes, McCain, and health care?

Asked by Judi (39850points) October 20th, 2008

If a person makes $50,000 a year and their employer pays $5,000 per year for health insurance, how much less money will actually go into that employees pocket on his paycheck in a McCain health care plan?

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22 Answers

basp's avatar

Probably about $5000.

Judi's avatar

I doubt that thir tax burden will go up $5,000, but they still won’t have the money for the health coverage, even though they will be taxed on it. Because they will be paying taxes on it, their pay check will go down.

wundayatta's avatar

As I understand it, the 5000 employer paid benefit would be taxed at the taxpayers marginal rate (highest rate). Lets pretend that’s 20%. Then the person would pay an additional $1000 in taxes. On the other hand, they’d get a 5000 credit, so they would net 4000.

I could be wrong, of course.

AlfredaPrufrock's avatar

Here’s a link to an article in Health Affairs about the implications of the McCain plan.

http://content.healthaffairs.org/cgi/content/full/hlthaff.27.6.w472/DC1

As a member of a family with long term professional military tradition, and as a long-term member of Congress, McCain’s experience with private sector health insurance is limited.

AlfredaPrufrock's avatar

Daloon, the $5000 credit is for a family plan; an individual would get a $2500 credit. The average cost for a family plan is $12,000 a year. I suspect the $5000 cost to the employer is for an individual plan.

wundayatta's avatar

@alfreda, I think all these are hypotheticals. If they only get a $2500 credit, then they would net $1500, in this scenario. In fact, I think individual plans are up around $8000, depending on what you’re willing to pay for.

In any case, I think the plan fails due to all kinds of other issues. There will be moral hazard, as folks attempt to purchase insurance only in the years they need it. Insurance companies will require very comprehensive health checks and demand medical records, and then deny all but the most healthy people access to the cheapest plans.

More people will end up uninsured, or even on the Medicaid roles. It’s a disaster. Fortunately, we won’t have to deal with it.

Judi's avatar

I just pulled that $5,000 out of the air. I wanted to use a “conservative” estimate

Judi's avatar

As a small business employer, my liability insurance (which is based on payroll) would also go up if the money I pay for insurance is now considered income.

AlfredaPrufrock's avatar

The other cost implication is that lower cost plans tend to HDHP plans with high deductibles. With an HDHP with a $4,000 deductible, the employee would pay the first $4,000 of costs out-of-pocket (often preventive care is covered at 100%) including prescriptions at retail.

If you are on a group plan, and change to another carrier, then pre-ex is generally not a factor. It’s when you have a gap in coverage that pre-ex kicks in. The rules are slightly different for individual, small group and large group plans.

(I work for an health insurance company.)

Judi's avatar

Alfreda,
What’s HDHP?

AlfredaPrufrock's avatar

@Judi High Deductible Health Plan, sometimes called a CDHP Consumer Driven Health Plan.

Judi's avatar

thanks :-)
I wish people would start seeing health care costs as a tax.

AlfredaPrufrock's avatar

60% of the insured population uses less than $500 worth of health care a year.

wundayatta's avatar

Well, if you have to have an HDHP, full coverage of preventive care (read, annual checkups and exercise clubs?) and full coverage of prescription drugs is a good thing. However, if you don’t cover sick care, it seems to me you are asking for trouble. Some people won’t get care when they should, and end up hospitalized, and there goes your savings on the deductible.

So, what’s the thinking within the health insurance company you work for? Do they have any preferences?

@Judi, you’re right. Health Insurance premiums should be seen as a tax. Employers should make it clear to employees exactly how much they, together, are paying for coverage. If people could compare their full health insurance costs as a percent of their salary to a payroll tax for single payer health insurance, most of them would see a savings, and some would see a significant savings. Employers who didn’t already pay for insurance would be among those seeing their costs go up in such a plan.

@alfreda: but which 60%. And of course, 40% use more, and often a lot more. Now most of them are covered by Medicaid and Medicare, but still, you’ve got to find the healthy, if you’re to make money.

AlfredaPrufrock's avatar

Full coverage of prescription drugs is unheard of. Preventive is wellness check-ups, flu shots. No exercise clubs, weight watchers, etc. You have to pay 100% of your prescription costs until your deductible is reached. Health insurance is actually a financial planning tool, and the network the carrier offers is pretty important, because even with a HDHP, your cost is the network negotiated rate.

Our position is that state regulation of health care carriers drives up cost, that there should be a national code of requirements. In terms of plans, we are big on HDHP plans. Plan design is moving towards offering HDHPs not only on a PPO base, but HMO and POS as well.

jvgr's avatar

Perhaps my explanation of how taxes relate to pay in Canada would be helpful:
The pay stub will show:
Gross income,
Then come the deductions for income taxes, social security, unemployment et al., including employee share of health benefits.

Finally is a description of taxable benefits which includes the employers contribution to the employees medical plan.

So your gross income reflects the amount your employer paid for your health plan.

In the end, a major change in taxation of something like health care plans will ensure that health insureres will try to figure out a way to get more money for the same plan.

AlfredaPrufrock's avatar

I think it will lead to your employer dropping coverage. Our pay stub only shows the employee contribution. If your employer offers a health plan, and you do not take it, your pay check does not go up by the amount the employer did not pay the insurer on your behalf.

St.George's avatar

If you can get coverage. My son was born with a disability, and unless he’s covered through my work insurance, he’ll never get covered for a reasonable amount, not to mention when he’s an adult. Think of all the thousands of people, children and adults, with disabilities. A healthcare-for-all plan will help them. Mc Cain’s plan doesn’t address that issue.

IchtheosaurusRex's avatar

I took a look at McCain’s proposal and it scares the crap out of me. Most Americans aren’t qualified to make the kind of informed decisions they would need to make under his proposals. I think he caved to his party’s ideology on this one. It’s just bad, but fortunately, it’s just talk. Even if he wins, he won’t get it through Congress.

laureth's avatar

I’m sure that the value of the theoretical $5000 that the employer pays on an employee’s behalf will just be counted as income. And how much of that is taxed will depend on the total amount of income (including the insurance that the employer pays), in this case, $55,000.

An individual who earns $50K will pay $8,930 in federal taxes (assuming they didn’t get all fancy with the deductions). Someone who made $55,000 will pay $10,180 (same assumptions apply). That leaves them with $1250 more to pay in federal taxes than if the employer’s health benefit had not been taxed. Please note that I am not a tax professional and this information is based only on the IRS’s basic tax table found on their website.

Also, I’ve seen a lot of people think that under McCain’s plan, they’ll somehow receive a check for 5K to use for insurance. (That’s for families, though, not individuals.) What a tax credit is, is that they tax you as if you’d earned $2500 less than you really did – i.e., an individual earns $20,000/year, who pays out the (at least) $2500 for health insurance, is taxed as if they made $17,500. That’s great for people who can toss $2500 out to pay for their own insurance, but doesn’t help people that can’t afford to do that in the first place (like most poor or working-class folks I know).

finkelitis's avatar

That’s a great point laureth. So, to simplify this horribly, if we assume you pay 30% in taxes, and you make 20K a year, we have:

No tax credit: 20,000 * .3 = 6000 in taxes, 14,000 to take home
With tax credit: 17,500*.3 = 5250 in taxes, 14750 to take home.

So with these assumptions, that tax credit turns into just 750 extra a year. (750 = .3*2500—note that this amount depends only on the tax rate, not your actual income). In other words, the extra take home from the tax credit is just 750 dollars assuming a 30% tax rate. If you make less (and are hence taxed at a lower rate), you actually get less from this. So this helps people less if they have less money.

I hadn’t realized how regressive this was. And how little it helps. Am I understanding this right? This is pretty pathetic if that’s all he’s offering.

laureth's avatar

I believe you are understanding it correctly. And if you can find worthwhile health insurance for $750 annually (or even $2500), buy it, because you’ll never see it again!

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