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Healthy Returns

Small businesses cheer the 100 percent health insurance deduction.

The senate debate in June about making 100 percent health insurance deductibility for the self-employed effective in 1999 catapulted that issue to the top of the congressional tax cut agenda. The debate accompanied wrangling over the tobacco bill, to which the health insurance issue was attached. In June, however, the tobacco bill was recommitted to the Senate Committee on Commerce, Science and Transportation, in effect killing it.

But at the end of July, House Republicans resurrected the 100 percent deductibility provision when they included it in their managed-care health bill, which passed by a vote of 216 to 210 on July 24.

Under current law, the health insurance deduction for the self-employed is scheduled to increase from 40 percent to 45 percent this year, on its way to 100 percent in 2007. There is considerable bipartisan support in Congress to expedite that schedule, although not necessarily to 100 percent in 1999.

The House and Senate fiscal 1999 budget bills, both passed before the Senate debate on tobacco began, assume tax cuts that include some improvement in the health insurance deduction. The Senate budget resolution included a cut of $30 billion over five years, with $300 million of that earmarked for improvement in the health insurance deduction, according to Amy Call, an aide to the Senate Committee on the Budget. However, a small-business lobbyist says that the Joint Tax Committee, in an unpublished estimate, pegged the cost of bumping up the deduction to 100 percent in 1999 at as much as $6.5 billion over five years.

When the tobacco bill came up for a vote on the Senate floor in June, senators were looking for "health promotion" programs to spend some of the $72 billion in new cigarette taxes on. At the top of the list was a proposal to increase the health insurance deduction for the self-employed sooner. Both Democrats and Republicans supported the idea. Sen. Phil Gramm (R-TX) proposed an amendment linking 100 percent deductibility to reduced taxes for married couples filing joint returns; the amendment passed.

By limiting his agenda to those two tax cuts, Gramm, a member of the Senate Committee on the Budget, crowned the marriage and self-employed health deductions the king and queen of tax cut proposals in 1998. Even President Clinton, who is generally opposed to tax cuts, supported the immediate 100 percent deduction, according to an aide to Sen. Thomas A. Daschle (D-SD).

In the end, the tobacco bill may have given its life so that 100 percent health insurance deductibility for the self- employed could live.


Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.

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This article was originally published in the September 1998 print edition of Entrepreneur with the headline: Healthy Returns.

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