Why penalize Ga. families for buying health insurance?

Kelly McCutchen's picture

What if someone proposed a law to tax working families $5,000 or more if they purchase health insurance? Such legislation would have no chance of passing. Yet it is, in effect, a painful reality for many Georgia families.

More than 400,000 Georgians work in small businesses that don’t offer health insurance. A fundamental flaw in the federal tax code since the 1940s excludes these individuals from the massive tax exemptions available through employer-purchased health insurance.

Here’s a typical case of how the penalty hurts families: “Kenny” was a loan officer at a community bank. As part of his compensation, the bank offered a comprehensive healthcare plan that covered Kenny, his wife and two daughters. The premium was $13,000 a year.

Unfortunately, last year the bank was closed by regulators and Kenny was forced to find another job. He found a position with a small company as a chief financial officer. The salary was lower but enough to pay their bills. But his new employer, like so many small businesses, did not offer employees health insurance.

Kenny’s wife, Kim, found a health insurance policy online for the same price, $13,000 a year, and decided to go back to work to earn enough money to pay for the family’s health insurance.

Kim was feeling pretty good until she talked to her best friend, Carol, an accountant. “You do realize that $13,000 won’t be enough, don’t you?” Carol pointed out.

“With Kenny’s salary you are already in the 15 percent federal tax bracket. That means that 28 cents of every additional dollar you earn will go to taxes! It adds up quickly – 15 percent federal income tax, 6 percent Georgia income tax and over 7.5 percent for your share of payroll taxes.”

Carol’s explained Kim would have to earn $18,220 in order to have $13,000 left after taxes to buy health insurance.

“That’s $5,000 in taxes we didn’t pay when Kenny worked at the bank!” said Kim.

“Don’t shoot the messenger!” was Carol’s response.

Many Georgia families are in the same situation as this hypothetical family. This is both unfair and unjustifiable. The underlying problem is caused by the federal government, but Georgia can do something to resolve this.

One simple, low-cost solution for the state would be to authorize “list billing.” List billing takes advantage of “cafeteria plans” used by many small businesses to provide benefits such as life insurance on a pre-tax basis.

After employees select individual health insurance policies, the insurance carrier sends a bill to the employer with premium amounts itemized for each employee. The employer deducts the appropriate premium from the employee’s salary (through the cafeteria plan) before taxes.

Many insurance companies do not offer list billing due to concerns this could be ruled a group insurance plan, which is regulated much differently. Georgia should clear up this gray area by clarifying that the practice of small businesses offering list billing to their employees does not constitute a group health insurance plan under state law.

Georgia is already a national leader in addressing the health insurance tax penalty. Individuals may deduct the cost of high-deductible health insurance premiums from their Georgia income tax. Georgia also allows small businesses to make defined contributions to Health Reimbursement Accounts, which can help employees purchase health insurance with pre-tax dollars.

Hundreds of thousands of Georgians face enormous tax penalties when they purchase health insurance. This is particularly inexplicable when the stated goal of our leaders is to reduce the cost of healthcare.

Piling thousands of dollars in taxes on top of an already-expensive health insurance policy makes coverage unaffordable and inaccessible for too many hard-working citizens.

Georgia should take the lead in moving toward tax fairness by removing this significant financial barrier to broader health insurance coverage.

Adding up the Tax Penalty

Taxable income — $18,220

Federal Income Tax (15%*) — $2,733

State Income Tax (6%) — $1,093

FICA (6.2%) — $1,130

Medicare (1.45%) — $264

After-Tax Income — $13,000

Total Tax Penalty — $5,220

* For married couples, federal taxable income above $17,000 is taxed at the 15% tax bracket.

[Kelly McCutchen is president of the Georgia Public Policy Foundation (www.georgiapolicy.org), an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians.]

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