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The Three R's of McCain's Health Tax Credit

The opinions expressed by columnists are their own and do not necessarily represent the views of
When one person calls something a tax hike and another calls it a tax break, they can't both be right.

Democratic Sen. Barack Obama has accused Republican Sen. John McCain of attempting to impose the "largest middle-class tax hike ever" on the American people.

How? By giving them a tax credit.

In his historic barrage of TV ads, Obama has zeroed in on McCain's health care plan. He has warned people that "what one hand giveth, the other hand taketh away."

It's frightening. These ads are aimed at the couple hunched over the kitchen table piled with bills, wondering where this shaky economy is going.

And Obama's telling them a great big whopper.

Yes, the value of job-based health insurance policies would become taxable. But that's where the whopper starts. Obama's ads leave viewers believing McCain is just going to tax their benefits and walk away.

Peeling that wool off our eyes, however, we see that McCain would offer them a tax credit more generous than the benefit they have now. The credit is worth $5,000 for families and $2,500 for individuals. How does it work? Here's an easy -- and necessary -- explanation.

The Three R's:  Replace, Retain, Refund.

For those who have job-based health insurance, McCain's tax credit replaces an existing tax benefit they're already receiving.

Meanwhile, employers retain the same tax benefit they receive now for providing coverage to their workers.

For those who don't have job-based policies now, the credit is real, new money for health coverage. It's
refundable -- meaning those too poor to pay taxes still receive the same amount.

The replacement point is important because it answers the $12,000 question: Is the tax credit supposed to pay the entire cost of your current job-based $12,000 insurance policy? No. It's supposed to shield you from paying taxes on it -- just like the current system does. The difference is, you actually get more money with McCain's credit.

For example, let's say Tom the carpenter has a taxable income of $40,000 a year. That means the government takes 15 percent of his income in taxes each year. He works for a generous construction company that provides him and his family with a group insurance policy valued at $12,000.

Right now he is getting a break worth $1,800, protecting his health insurance from taxes -- but McCain would give Tom and his family a tax credit of $5,000. Under the McCain plan, Tom comes out $3,200 ahead.

Even the liberal Tax Policy Center has acknowledged this is a tax cut. "Families at all income levels would pay lower taxes, at least on average," Len Burman of the Tax Policy Center told CBS.

And each employer still retains his business deduction for the costs of paying employees, whether he's paying them in cash wages or non-cash benefits such as health insurance.

One policy analyst explained it this way: "The most promising way to move forward in all three dimensions [of health care] -- coverage, cost, and long-run fiscal situation -- is to replace the employer exclusion with a tax credit ... Firms would still be allowed to deduct the cost of their contributions to employee premiums, just as they can deduct wages and other expenses today for the purpose of calculating taxable income."

That was Jason Furman, Obama's top economic adviser, writing in a February 2008 report. He certainly wasn't endorsing McCain's plan, but he showed he understood the value of a tax credit.

Too bad he wasn't consulted on Obama's misleading ad campaign.

To illustrate the refund aspect of the credit, let's take Nicole the barista. She's single and works in a small, independent coffeehouse making a little more than minimum wage. Her boss has only a few employees and can't afford to provide health insurance. Under the McCain plan, Nicole would get a $2,500 tax credit that in many states would go a long way toward purchasing an individual insurance policy. She could go from being uninsured to insured.

As a bonus, her new insurance policy won't be tied to her employer. If the coffeehouse closes and she goes to work at a bookstore, she will have no interruption in health coverage. Her policy and her tax credit would go with her.

McCain's health care proposal includes many more provisions, such as a Guaranteed Access Plan for those struggling with pre-existing conditions. But the tax credit has been the most ballyhooed and will be the most important for the majority of Americans.

Obama's ad push isn't over yet. His 30-minute infomercial attracted more than 26 million viewers, and we're sure to see a last-minute flurry of ads in the coming days.

Americans should listen to what he has to say with the skepticism deserved by someone whose ads are misleading a nation -- when even his top economic adviser knew better.

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