Overview

Many firms that employ low-wage workers cannot afford to offer an employee health plan, and many of the uninsured work for such firms. This partly explains why so many Americans are uninsured, since most low-wage workers and their families are also ineligible for public programs such as Medicaid and cannot afford individual coverage. A system of federal tax credits to provide incentives to businesses that employ low-wage workers to help pay for insurance would enable more firms to offer group health insurance. Such a system could be administered through the IRS. Since it would require no new bureaucracy and no direct budgetary appropriation, its political feasibility would be enhanced. However, it might be expensive. Unless the employer tax credits are set at levels high enough to cover a large share of the cost of insurance, the take-up rate among both employers and employees would be low.

The program we propose would be targeted to low-wage firms, those in which average wages are less than $10 per hour, but the premium subsidy would be graduated so that the credit is largest for firms with the lowest average wages. For example, the maximum credit, equal to half the value of a "Standard" benefit package, would go to firms with average wages below $7 per hour. Firms with somewhat higher wages would get somewhat less, say 40 percent; and firms nearing $10 per hour would get the minimum credit of 30 percent.

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