Could Tax Credits Be a Source of Sustainable Financing for Population Health?
Later this week, on December 7, the Population Health Roundtable of The National Academies of Sciences, Engineering, and Medicine (NASEM) will hold a day-long convening on “Exploring Tax Policy to Advance Population Health, Health Equity, and Economic Prosperity.” Yours truly will be presenting the ReThink Health initiative’s work on tax credits, ably accompanied by our “Taxy Lady” team of Ella Auchincloss, Nina Burke, Maggie Cooke, Amanda McIntosh, and Katherine Wright—most of whom you’ve met right here through their blog posts.
Our team asked a simple question: could tax credits provide a source of sustainable financing for population health and, if so, under what conditions? We have developed a draft white paper outlining our research and perspectives on the topic (very nerdy in nature—if you’re like us, you should give it a read!). You can find it here. A preview of the paper’s main points follows, which I’ll also be sharing at the convening:
- HUGE amounts of money are spent at the state and federal levels each year on tax breaks (a tax credit is one type of tax break). At the federal level, tax breaks were claimed on 169 million tax returns, totaling $1.5 billion. These tax credits span numerous sectors, including health. But outside of some notable and important tax credits that impact the social determinants of health, such as the Earned Income Tax Credit and the Low Income Housing Tax Credit, this ubiquitous instrument is not being used to advance population health.
- Ahem…aren’t tax breaks just boondoggles? With roughly 170 tax breaks approved at the federal level alone, it can certainly seem that way. Indeed, evaluators, including the San Francisco Federal Reserve Board and the UpJohn Institute, have shown that the $45 billion in business tax incentives offered by state and local governments each year have not been effective at creating jobs and economic growth. But other tax breaks have been highly successful at achieving those goals. We learned from our research that the design of the tax credit program matters greatly to its success and, moreover, we can identify specific features that are critical to a tax credit’s effectiveness. For example, a handful of states offer tax credits for charitable giving (which is in addition to the federal deduction for charitable giving). Research by Daniel Teles suggests that Iowa’s program increased overall donations to community foundations by 125%, while there was no evidence that Arizona’s program to incentivize donations to anti-poverty organizations actually increased the total amount of giving (despite $20 million of contributions). The two programs were structured quite differently—Arizona offered a much bigger tax incentive than Iowa, but capped each taxpayer’s giving at a relatively small amount.
- A sizeable and growing set of evidence-based population health interventions generate enough financial returns on investment (ROI) to be stimulated by tax credits. Interventions with proven effectiveness can be found in numerous sectors, including, but not limited to: certain mental health treatments for adults and children, maternal health, substance abuse prevention and treatment, lead abatement, child welfare, K-12 education, healthy eating, and weight loss programs, and criminal justice programs. We believe that a tax credit program can and should be constructed to subsidize only those interventions with proven ROI. Doing so ensures that a tax credit meant to improve population health (necessarily encompassing not just one of these interventions, but a portfolio of them) would accomplish its objectives and serve as a sound investment for taxpayers. Taxpayers stand to receive returns through lower health care costs, higher taxes (because people are more productive and, therefore, earn more), and depending on the interventions included in the portfolio, lower K-12 education costs, criminal justice costs, and child welfare costs.
- Tax credits work by reducing the cost of a good or service, thereby stimulating the markets for those goods/services. In effect, taxpayers (through their government) share the costs of investing in population health with private sector investors (individuals or corporations). For example, an opioid treatment program has an average cost of $356 per person with average financial benefits per person of almost $2,700 and social benefits of $5,300. These benefits accrue over two years. That’s a great total return! But the benefits are split between a number of beneficiaries, including taxpayers (who save $370 each in health care costs) and health plans (which save $383 each in health care costs). As it stands, neither the taxpayers nor the health plans have much of an incentive to pay for the program because their return in health care savings is about the same as the program’s cost. But imagine that the state government offered a 50% tax credit to the health plans—in effect, splitting the cost with them. The net cost to the health plans is now $178, so their return is now 215%. Likewise, the taxpayers pay $178 for a return of 208%. Now we have a market.
- So which markets might be stimulated to improve population health? While there are markets for singular goods and services that affect population health, such as affordable housing or healthy food, our analysis is focused on how tax credits might help fund a portfolio of population health investments over time.
One possibility is providing tax credits to health plans and/or self-insured employers, who have huge financial interests in containing health care costs. While the population covered by such a tax credit would be limited, it is quite significant: for-profit health plans fully insure 62 million Americans and an estimated 100 million Americans are covered by self-funded employer plans (that is, employers assume the risk for the health care costs of their employees, rather than covering them through a health insurance plan). To learn more about this potential design, Nina Burke has outlined how it could work here. A second possibility is using tax credits to spur charitable giving, such as to wellness funds—a pool of funds used to support investments in population health. A number of states offer tax credits for donations to specific organizations and/or purposes. The largest of the state programs raised $40 million in Michigan (for homeless shelters and food banks, a program ended in 2011), and $24 million per year in Iowa for community foundations. My colleague, Amanda McIntosh, explores this idea to finance wellness funds via tax credits here. Charitable giving by individuals and corporations can be spurred through tax incentives, although giving seems to respond to a variety of factors: the health of the economy, the sector being donated to, the income of the giver, whether it is structured as a match, and other features of the state tax code. And it’s important to be mindful of unintended consequences. If a tax credit were offered to encourage population health donations, for example, we would want to ensure through the design of the program that the amount of giving will actually increase. Poor outcomes would be paying for donations that were going to be made anyway, without the tax credit as an incentive, and/or shifting the donation from one sector to another without increasing the overall level of giving.
- The opportunity for action is likely to be at the state level. Staking a population health credit on the action by Congress is probably tantamount to Waiting for Godot. But states have a different set of incentives and opportunities. First, containing Medicaid costs is increasingly important for states. All states except Vermont have some type of a balanced budget requirement, and Medicaid is the second-largest expenditure item behind K-12 education. Second, states are becoming increasingly aware that their collective $45 billion investment in business incentives is failing to produce as expected. The Pew Charitable Trusts has called for improved accountability and evaluation, and since 2012, 21 states have enacted laws requiring periodic evaluation. We know that health and the economy are linked (see my previous blog post), so states wishing for higher ROI could choose to redeploy their tax credit dollars in population health instead.
In upcoming blogs, ReThink Health’s tax credit team will provide some examples of how tax credits could be used for population health, and Project Director Ella Auchincloss will summarize the outcomes from the NASEM meeting. The NASEM meeting is open to the public. If you’d like to learn more about tax policy as a funding source for population health, we encourage you to join us on December 7th in Oakland, CA or via live stream. For either option, please click on the registration link here. We also invite your comments below. We are especially interested in learning what kind of population health investment YOU think might be inspired by provision of a tax credit.