ABC News’ Teddy Davis and James Gerber Report: Sen. John McCain’s, R-Ariz., health-care plan would replace the existing tax exclusion for employer-sponsored coverage with a refundable tax credit for all Americans. The tax change is intended to create a more equitable system that provides everyone — including those who do not receive their health coverage from their employer — with the same tax advantage. And since it is refundable, it would provide a cash benefit to those who earn too little to pay federal income taxes.
But if the cost of health care continues to outpace inflation in the economy at large, McCain’s health credit would morph into a tax hike for those who currently receive a tax exclusion for employer-sponsored coverage, according to a study released Wednesday by the liberal Center for American Progress.
"For millions of middle class families, the credit is smaller than the current tax subsidies, meaning that it is in fact a tax increase," said Elizabeth Edwards, the wife of former Sen. John Edwards, D-SC, and a senior fellow at CAP. "I know he’s pledged not to have any tax increases, but this in fact will work as a tax increase."
McCain’s tax credit could morph into a tax hike because the credit grows only at the rate of inflation (about 2 percent a year), while current tax subsidies keep up with health insurance premiums (which are growing at about 7 percent per year).
For a couple earning $40,000 per year and paying an average premium of $13,800, McCain’s new tax credit would cut their taxes by $50 in 2009.
"[B]ecause the credit quickly falls behind rising premiums that are the basis for the current tax break, the family would pay $1,169 more in taxes in 2013. The family would pay $2,809 more in taxes by 2018," write James Kvaal, Peter Harbage, and Ben Furnas, the report’s authors.
The McCain campaign does not dispute the study’s assertion that the Arizona senator’s proposed tax credit would offer a smaller subsidy over time than the current exclusion if health premiums continue to grow more quickly than inflation.
The McCain campaign is hoping, however, that its tax credit will exert downward pressure on prices.
It is also hoping that other reforms favored by the presumptive Republican nominee will lower costs, making his tax credit sufficient.
"John McCain believes that the fact that health care spending outpaces inflation by a factor of three is exactly the problem, and is exactly why health insurance is increasingly out of reach for Americans," said McCain spokesman Brian Rogers. "John McCain’s plan includes prevention, affordable drugs, greater use of health information technology, coordinated care, and medical liability reform to address the rising cost of care to reverse this trend."