Health Coverage Tax Credits Under the Trade Act of 2002

Federal income tax credits intended for the purchase of health insurance coverage have, perhaps more than any other policy element, repeatedly surfaced in proposals offered by both Democrats and Republicans to address the steady increase in the number of uninsured Americans. The new system of Health Coverage Tax Credits (HCTCs) established under the Trade Act of 2002, the United States' first experiment in roughly a decade with fully refundable and advanceable federal income tax credits for health insurance, offers a tremendous opportunity to learn whether such credits can be effective and, if so, how they can best be structured.

In studying the progress made in implementing the Act's provisions through the end of 2003, we have noted important successes as well as potential weaknesses that may require correction. Officials have done a remarkable job establishing the federal and state infrastructure for the new program, and beneficiaries in many states are offered numerous coverage options from which to choose. On the other hand, take-up of the tax credits has been quite limited thus far; many HCTC health plans treat beneficiaries very differently based on their age, gender, and prior health history; and the new program's administrative costs may be quite high (although some such costs involve necessary infrastructure development rather than ongoing operational expenses). It bears considerable emphasis that, roughly six months after the start of advance payment, it is far too soon to come to any conclusions about the success or failure of HCTCs. Nevertheless, it is already clear that Trade Act health coverage is likely to teach policymakers important lessons about the viability and potential design features of tax credits that could cover a much larger group of uninsured Americans.

Note: An Issue Brief and more in-depth report are posted at right.