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Explaining Conservatives' Decades-Long Support for Refundable Tax Credits

Republican leaders in Washington have reportedly coalesced around refundable tax credits as an alternative to the Affordable Care Act’s subsidies for health insurance. 

But they are getting pushback from some Republicans who see the tax credits as a new entitlement. It may be worth reviewing the history and why tax credits became the preferred Republican option. 

There is an inequity in the tax treatment of health insurance. Some 160 million workers and their dependents have employer-provided health insurance. The money employers spend on health insurance is excluded from workers’ income. That tax exclusion cost the federal government about $250 billion annually, and is a huge tax benefit for workers. Self-employed workers receive a 100 percent tax deduction. But employees who have to buy their own coverage receive no tax benefit. 

For years conservatives have wanted to level that tax playing field so as to no longer encourage employer-provided over individual coverage through the tax code. The question was how to do that? 

Economist Milton Freidman proposed ending all tax breaks for health insurance, but there would be huge political resistance to that approach. 

The most popular conservative solution has been to end the current tax exclusion and replace it with a universal refundable tax credit. The alternative was to provide a standard deduction. 

The standard deduction is less susceptible to fraud than a tax credit, but it does nothing for someone who pays no income taxes, which is nearly half the population, most of whom are lower-income workers.  

A tax credit comes directly off what a person owes in taxes; a refundable tax credit means the person can keep the difference if the credit is more than his tax obligation. So lower-income workers who pay little or no income taxes would have money to help them purchase coverage. 

The biggest political challenge in creating tax fairness is that critics, including Barack Obama as a presidential candidate, demagogue ending the tax exclusion for employer-provided coverage. 

In order to avoid more demagoguery, Republicans decided to target the tax credit to only those who do not receive the employer tax exclusion. 

Those who support the tax deduction over the credit will have to decide if they will include a separate health insurance subsidy for lower-income workers. Without some type of subsidy the number of uninsured will rise dramatically.  Is that politically tenable post-Obamacare? 

For years conservative health policy experts hoped for tax fairness in health insurance. The refundable tax credit for those without employer coverage is at least a start in that direction.