President Bush in his State of the Union address on Tuesday promoted his proposal to offer a federal tax deduction of $7,500 for individuals and $15,000 for families who obtain health insurance on their own or through an employer, saying that a change in the tax code is a "necessary step to making health care affordable for more Americans," the New York Times reports (Toner/Pear, New York Times, 1/24). Bush's proposal, which he first announced in his weekly radio address on Saturday, would for the first time levy a tax on the value of employer-sponsored health insurance in some cases. Currently, most employees are not taxed on the value of their employer-sponsored health insurance. Under the proposal, individuals and families with employer-sponsored health insurance plans worth more than the proposed allowable deductions would pay taxes on the difference. The deduction would be available to all individuals and families who purchase health insurance, regardless of the value of their policies or whether they itemize deductions on their tax returns. For U.S. residents who receive employer-based health insurance, the deduction would be offset by the cost of their coverage. The proposal would pose no net cost to the government over 10 years, according to the administration (Kaiser Daily Health Policy Report, 1/23). In his address, Bush said that "government has an obligation to care for the elderly, the disabled and poor children" but that "[f]or all other Americans, private health insurance is the best way to meet their needs." He said his tax proposal would "level the playing field for those who do not get health insurance through their job" and result in "a substantial tax savings" for U.S. residents who purchase health insurance on their own. Bush said that a family of four with an annual income of $60,000 that purchases its own health insurance would save $4,500 in taxes annually under the proposal. Bush continued, "[F]or the millions of other Americans who have no health insurance at all, this deduction would help put a basic private health insurance plan within their reach" (Bush speech text, New York Times, 1/24).

Potential Tax Impact

According to the administration, initially about 100 million of an estimated 175 million U.S. residents with employer-sponsored health insurance would owe less in federal taxes under the proposal. The average employer-sponsored health plan costs about $11,500 for families and $4,200 for individuals in 2006, according to a Kaiser Family Foundation and Health Research and Educational Trust survey (Appleby, USA Today, 1/24). U.S. residents with the highest 20% of annual incomes -- about $75,000 to $80,000 and up -- would pay more in federal taxes under the proposal, according to the administration. According to the Tax Foundation, 53% of uninsured U.S. residents pay no federal income taxes and therefore would not receive tax benefits under the proposal (Weisman/Fletcher, Washington Post, 1/24).

State Funding Proposal

Bush in his speech also proposed redirecting portions of existing federal health care funding to "help the states that are coming up with innovative ways to cover the uninsured." Bush proposed that the funding be used to establish "Affordable Choices" grants that would give states "more money and more flexibility to get private health insurance to those most in need." Bush said, "States that make basic private health insurance available to all their citizens should receive federal funds to help them provide this coverage to the poor and the sick" (Bush speech text, New York Times, 1/24). The proposal would redirect about $30 billion in federal Medicare and Medicaid funding currently designated for disproportionate share hospitals -- facilities that treat a large number of uninsured and underinsured patients -- and capital funds, according to CQ HealthBeat (Carey, CQ HealthBeat, 1/23).

Other Health Care Issues Mentioned

Bush identified rising spending on entitlement programs such as Medicare and Social Security as a problem that needs to be addressed, but he did not offer any new long-term proposals to do so, according to the Times (New York Times, 1/24). Bush said there are "many other ways that Congress can help" improve the health care system, including measures to "expand health savings accounts" and "help small businesses through association health plans." Bush also called for "better information technology" in health care, which he said would reduce costs and medical errors. He added, "We will encourage price transparency, and to protect good doctors from junk lawsuits, we need to pass medical liability reform." Bush concluded the health care portion of his speech by saying, "In all we do, we must remember that the best health care decisions are not made by government and insurance companies, but by patients and their doctors" (Bush speech text, New York Times, 1/24).

Democrats' Response

In the Democratic response to Bush's speech, Sen. Jim Webb (D-Va.) did not address the president's health care proposals (Webb speech text, Washington Post, 1/24). House Ways and Means Health Subcommittee Chair Pete Stark (D-Calif.) said the panel would not hold hearings on Bush's tax deduction proposal, adding that it would "make a bad problem worse" (Hirschfeld Davis, Baltimore Sun, 1/24). Roll Call reports that the proposal "is unlikely to see much, if any, action in the Senate this year in the face of near-universal opposition from Democrats and a GOP base still stinging from the Social Security debacle of the 109th Congress" (Stanton, Roll Call, 1/24). Senate Majority Leader Harry Reid (D-Nev.) said, "It's difficult to imagine a proposal like this making it through the House or the Senate" (New York Times, 1/24). Senate Finance Committee Chair Max Baucus (D-Mont.) said, "It's putting health care on the table, it's a higher profile and all that's very good," adding, "The devil is in the details." Sen. Ron Wyden (D-Ore.), a member of the Finance Committee, said the current tax system unfairly penalizes individuals and families who purchase health insurance on their own but added, "You have to make the changes in a very careful way, or else you could see a lot of middle-class people get hurt" (Armstrong, CQ Today, 1/23). Senate Health, Education, Labor and Pensions Committee Chair Edward Kennedy (D-Mass.) said, "The President's proposals are an opportunity missed. They will not improve access to good coverage, and won't help working families afford the spiraling cost of health care" (Roll Call, 1/24).

Additional Comments on Tax Proposal

Sherry Glied, chair of the health policy department at the Mailman School of Public Health at Columbia University, said Bush's tax proposal would have a "minimal" impact on the number of U.S. residents without health insurance (Graham, Chicago Tribune, 1/24). Nina Owcharenko, a senior health policy analyst at the Heritage Foundation, said, "Changing the tax treatment is really one of the fundamental problems the health care system faces" (Dembner, Boston Globe, 1/24). Paul Fronstin of the Employee Benefit Research Institute said the proposal could encourage employers to stop offering heath insurance benefits (Chicago Tribune, 1/24).

Comments on State Grant Proposal

Rich Umbdenstock, president of the American Hospital Association, said Bush's proposals to redirect money from hospitals to states in an effort to boost insurance coverage among residents "are unworkable for many and not focused on those most in need." Chip Kahn, president of the Federation of American Hospitals, said, "Any actions to expand coverage shouldn't undercut the current system and thus leave vulnerable populations at risk," adding, "The prudent course would be to strengthen Medicaid and Medicare and stabilize the safety net while also developing comprehensive solutions that address the crisis of the uninsured" (Carey, CQ HealthBeat, 1/23). Chris Burch, executive director of the National Association of Public Hospitals and Health Systems, said, "We're distressed the coverage expansion would be paid for by taking (money) away from providers that have cared for the uninsured," adding, "You're always going to need a safety net in this country. Nothing being proposed now is anywhere near universal coverage" (Young, The Hill, 1/24).

Focus on Health Care, Comments

Unlike the 2006 State of the Union address, Bush began his speech by addressing domestic issues including health care (Lambrecht, St. Louis Post-Dispatch, 1/24). Bush's focus on his domestic agenda "was a message that said he should not be regarded as a lame duck," according to the Washington Post (Balz, Washington Post, 1/24). Drew Altman, president of the Kaiser Family Foundation, said, "In Washington, we have this huge ideological gap on how to reform health care. But we're really seeing the beginning of a new national debate" (Boston Globe, 1/24). Karen Ignagni, president of America's Health Insurance Plans, said, "I think the president is jump-starting a national discussion over expanding health care coverage" (Chicago Tribune, 1/24).

The health care related items in Bush's speech are available online at kaisernetwork.org.

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Kaisernetwork.org is a free service of the Henry J. Kaiser Family Foundation.