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February 2007

State of the Union Address

In the 2007 State of the Union address, President George W. Bush proposed a new voluntary federal grant program using existing health funds to assist the states in their efforts to cover the uninsured. Called the “Affordable Choices Initiative”, the federal government would provide the states with flexibility and funding to provide the uninsured with private insurance. The health proposals were mentioned after other domestic priorities such as balancing the federal budget, education, and controlling spending in entitlement programs such as Medicare and Medicaid.

The idea of delegating the issue of the uninsured to the states has gained momentum during the last session of Congress. In the 109th Congress, several proposals were introduced that would support state demonstrations to cover the uninsured. With the federal government now operating under “pay as you go” (PAYGO) fiscal rules, combined with a large federal debt, comprehensive federal action in health care remains uncertain. In the absence of federal action, several members of congress—and now the President—have recognized the states as laboratories of innovation; legislation has been introduced that would authorize a limited number of state pilot programs to cover the uninsured.

The President also proposed significant changes in the tax code as part of his address. Under current federal tax policy, health insurance premiums are, for the most part, tax- exempt, because an employer and employee (under certain circumstances) can deduct the cost of health insurance premiums from income before federal taxes are calculated. This “tax-exclusion” of health benefits is available only to those who receive health insurance via their employer or are self-employed, but is not available for workers who do not have access to employer-sponsored insurance and can only purchase insurance though the individual (non-group) market.

Current tax treatment of health insurance benefits that provides unequal treatment of employer-based insurance and individually purchased (non-group) insurance led to the President’s new tax proposal. Under the proposal, all contributions (both employer and employee) to health insurance would be counted as taxable income for employees and a standard tax deduction of $7,500 for single workers and $15,000 for families would be applied. The idea is to provide equal tax treatment between people purchasing in the individual market and people receiving insurance from their employer, as all would get the same standard deduction. Employers could continue to count any money that they paid to employees in the form of wages, health insurance, or any other compensation as an expense that they write off against their taxes.

Some see a refundable tax credit as a more appropriate vehicle than a standard deduction for health coverage because a majority of the uninsured earns less than 200 percent of the federal poverty level. Others note that the plan does not make individual coverage more available or affordable for those with low incomes or health problems. Finally, there are concerns that tax incentives to purchase in the non-group market would further erode employer-sponsored coverage.

A full transcript of the President’s 2007 State of the Union address is available at

A toolkit on the President’s proposal compiled by the Alliance for Health Reform is available at