Using tax credits to pay for health care premiums gets complicated

By The Associated Press

Using the federal income tax system to promote social policy goals is a time-honored strategy for policymakers of both political parties.

The nation’s main anti-poverty program, the Earned Income Tax Credit, uses the tax system to supplement the earnings of low-income families. Employer-provided health insurance is tax-free for workers and tax-deductible for companies, a huge boost for workplacecoverage.

But some economists say that the chief purpose of any tax system should be revenue collection, and using income taxes to advance social policy makes the code needlessly complicated, while also distorting incentives to work, save and invest.

Some pros and cons of using the tax system to help people pay premiums for private health insurance, as the Affordable Care Act does:

PRO: Could build support for the health overhaul because tax credits have greater political popularity than traditional government spending programs.

CON: Complicates tax filing for many lower-to-middle income people, who may not be able to afford tax-preparation services.

PRO: Avoids the social stigma of Medicaid, the safety-net health care program for low-income people. (Separately, the health law also expands Medicaid.)

CON: Requires people who get the tax credits to accurately project their incomes for the coming year, a real challenge for those who may not have stable employment.

PRO: The Internal Revenue Service has a lot of experience administering tax provisions that serve a social policy agenda, from mortgage deductions for home ownership to child care tax credits that help families.

CON: It constitutes mission creep for the IRS, straining the agency when an estimated $385 billion a year in taxes owed, or more, goes uncollected.