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McCain's Tax Plan Carries Risk

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The Associated Press

Published: July 7, 2008

WASHINGTON - WASHINGTON - There's a great unknown about Sen. John McCain's health plan: How many employers would drop insurance coverage for their workers because of his tax policies?

The Republican presidential nominee-in-waiting has proposed that everyone buying health insurance get a refundable tax credit, $2,500 for individuals and $5,000 for families. At the same time, he would treat employer contributions toward health insurance like income, meaning workers would have to pay income, but not payroll, taxes on it.

McCain's Democratic rival, Barack Obama, says the plan would "shred" the employer-based system that provides health insurance to about 158 million workers.

Most health analysts won't go that far, but both liberals and conservatives say McCain's plan would strengthen the individual and small-group insurance market. And by strengthening that market, it will pull in workers now covered through their jobs.

The workers most inclined to make that transition will be younger, healthier ones who most likely will be able to buy a policy on the individual market for less than their tax credit, said Paul Fronstin, a senior research associate at the Employee Benefit Research Institute, which studies employee benefits.

To the degree that happens, the employer-based market will become less healthy as sicker, older workers keep employer-based coverage while more of the healthier workers move to the individual market.

"What you'll see happening is average cost in the employer-market will go up and average cost in the individual market will go down," Fronstin said. "You'll start to get into a cycle where people at the margin start to leave employer coverage for individual coverage. At some point, employers will start to ask: Why am I doing this if my workers don't value it anymore? If I don't need to do this to be competitive in the labor market, why should I do it?"

As much as Americans complain about the cost of health care, they like the fact that employers pick up most of their health insurance expenses. They also like that their share is taken from their paychecks on a pretax basis, and fear anything that could jeopardize that prized benefit.

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