Romney Is About to Make Bush’s Health-Care Blunder

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May 22 (Bloomberg) -- Mitt Romney, so long bedeviled by the politics of health care, may be about to make another serious mistake.

He is on the verge of spelling out a plan to replace President Barack Obama’s health plan. Romney’s advisers, both inside and outside the formal campaign, want the main component of his alternative to be a change in the tax code’s treatment of health care. But there are two versions on the table, and Romney is leaning toward the one that would offer much less help to the uninsured.

For decades, people have paid taxes on their wages but not on their health benefits. This policy gives people an incentive to get health insurance through their employers, rather than cashing out the benefits and buying insurance themselves. This reliance on employers, according to many analysts, is one reason health costs have grown so fast: People are less cost-conscious when they are paying for services indirectly. Those who don’t have access to employer-provided coverage, meanwhile, are left out in the cold by current policy.

In 2007, George W. Bush’s administration proposed to start treating individually purchased and employer-provided coverage the same. People who got insurance either way would get a “standard deduction” of $15,000 off their taxable income -- and they would get the same deduction whether they bought cheap or expensive insurance, restoring the incentive to economize. Romney is considering reviving Bush’s idea.

Credit Versus Deduction

Like today’s tax break for employer coverage, the standard deduction would be most valuable to people in the highest tax brackets. The uninsured typically aren’t in those brackets. As a result, Bush’s proposal would have done little to increase rates of insurance coverage. At the high end of estimates, 9 million additional people would have gotten coverage. (About 50 million Americans lack insurance.)

That’s why other Republican health proposals have offered a tax credit instead of a deduction. A credit is worth the same amount of money in all tax brackets. When Senator John McCain ran for president, he proposed a $5,000 tax-credit plan for families. Representative Paul Ryan and Senator Tom Coburn have also introduced tax-credit plans. Compared with a deduction, a credit would increase the number of people with insurance much more for the same amount of money.

The Romneyites are reverting to the Bush proposal for several reasons. They worry that creating a new credit will complicate the tax code when Romney has called for simplifying it. But a credit is no more complicated than a deduction -- and either would do less to distort people’s economic decisions than the current policy.

They worry, too, that conservatives will balk at the tax credit. It’s true that many conservatives have complained about the proliferation of such credits. But most understand that it would be a step toward their ideals in health care. Most of the health-care wonks to whom conservatives listen favor tax credits. John Goodman, the president of the National Center for Policy Analysis, and James Capretta of the Ethics and Public Policy Center have both been advocates. So have Sally Pipes of the Pacific Research Institute and Grace-Marie Turner of the Galen Institute, both of whom have criticized Romney over his health-care record in Massachusetts.

What Conservatives Want

The Romneyites’ fear suggests that they don’t have a strong grasp of what conservatives actually think. Most conservatives consider Ryan and Coburn champions of their cause on health care as on other issues. A lot of conservatives have complained about McCain over the years, but not on this issue.

Conservatives are, if anything, more likely to criticize Romney if he comes out for the deduction, because it’s so underwhelming. Since a deduction would leave so many people still unable to get insurance on their own, it would also force governments to spend more money on pools for high-risk patients. That’s another reason for conservatives -- and everyone else -- to prefer a credit.

The politics of the issue have changed since Bush and McCain made their proposals, and in a way that strengthens the case for a credit over a deduction. The passage of Obama’s health-care plan means that millions of Americans who now lack insurance will get it.

If Romney comes out for replacing Obama’s plan with a tax deduction, he will be attacked for “taking away” that future coverage. A tax credit, on the other hand, could cover roughly the same number of people. (Here’s a low-end estimate.)

Romney should opt for boldness in covering the uninsured. At the same time, he ought to be cautious about disrupting people’s existing health-care arrangements. That’s the real political vulnerability of both the deduction and the credit: Either one would cause healthy people to leave large company plans for the individual market and thus cause those companies to raise premiums for those left behind.

But there’s a ready solution to this problem: For the time being, let people use the credit in the individual market only if they lack access to a company plan.

A deduction would iron out a kink in the tax code. A credit would give the conservative vision of health-care reform a chance. That’s why this decision, which may seem at first glance trivial, is anything but -- and why it will matter if the Romney campaign gets it wrong.

(Ramesh Ponnuru is a Bloomberg View columnist and a senior editor at National Review. The opinions expressed are his own.)

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