Trump Picks a Side: How Tax Credits Would Work in a G.O.P. Health Plan

Margot Sanger-Katz
MARCH 1, 2017

In a speech thin on policy specifics Tuesday, President Trump did mention one wonky term worth watching: tax credits.

He outlined a five-point plan for health reform that was largely aspirational, and probably consistent with the goals of nearly every Republican listening. But the issue of tax credits is actually an important dividing line in the Republican caucus. And it represents a break from Mr. Trump’s own position during the campaign.

Mr. Trump did not go into detail on this subject, saying merely that “we should help Americans purchase their own coverage, through the use of tax credits.” Yet those words were a signal to Republicans fighting over two options about how the government should pay for health insurance.

Some Republicans, including House Speaker Paul Ryan and the leaders of the House committees overseeing health care, want to fund health insurance with something called an advanceable, refundable tax credit. That functions sort of like a gift card; people can use it to buy health insurance regardless of their income.

Another group, led by the conservative Republican Study Committee and the House Freedom Caucus, believes that insurance benefits should be funded through the more common tax deductions, which allow you to subtract an amount from your income before paying taxes. Tax deductions are most valuable for people in the highest tax brackets. They’re less like a gift card, and more like a coupon.

During the campaign, Mr. Trump’s official health plan called for allowing people to use a tax deduction to buy health insurance. This is a strategy embraced by many conservatives, who have said they dislike tax credits because they represent too much federal spending. They are right that deductions tend to be less costly: They apply only to people who itemize deductions on their tax returns; they pay out less to people whose tax rate is low.

You can see the debate about credits versus deductions playing out in other parts of President Trump’s agenda. As outlined during the campaign, his plan to help families pay for child care would be primarily financed by a deduction, making the proposal most valuable to high-earning families, as my colleague Claire Cain Miller has written.

By comparison, tax credits tend to be more generous to the middle class. Mr. Trump didn’t say much about what kind of credits he’d like the government to offer for health insurance. But his comment appeared to be a nod to an emerging plan from several House committees that would hand out advanceable, refundable tax credits to all Americans buying their own insurance, with the value determined by their age. A draft version of a bill published by Politico last week gave one set of possible numbers.

A 20-year-old would get a $2,000 tax credit to buy health insurance, while a 64-year-old would get $4,000. People could use the full amounts to buy health insurance, even if they paid no income taxes at all. (That bill is just a draft, of course; the final value of the tax credits could well change.)

Obamacare also uses advanceable, refundable tax credits to help people buy health insurance. But those credits are calculated on a sliding scale, according to income. The goal is to make insurance affordable for lower-income Americans by limiting how much they can be asked to pay.

Compared with Obamacare, the House tax credit plan is regressive. Those flat age-based tax credits to buy health insurance would be valuable only to people who can afford to pay the rest of their health insurance bill. And they would be offered to many Americans with incomes currently too high for any tax assistance under Obamacare. As a recent Kaiser Family Foundation analysis shows, the House tax credit plan would be substantially less generous than Obamacare to the lower-income families who benefit most from the Affordable Care Act.

But compared with Mr. Trump’s campaign plan, his new embrace of tax credits is a step in the direction of progressivity. And it sets a marker in the fight among congressional Republicans, who remain divided about how much tax help the government should be providing for health care. To pass, the current Republican health plan will need to win over some conservatives who currently prefer deductions. Mr. Trump appears to have taken sides in that debate.