OTC Drugs Targeted for Tax Relief

December 1, 2003 (PLANSPONSOR.com) - A new bill has been introduced in the House of Representatives that would make over-the-counter medicines tax deductible.

>Last week US Representatives Jim DeMint (R-South Carolina) and Louise McIntosh Slaughter (D-New York) introduced H.R. 3596, the “OTC Medicine Tax Fairness Act.”   Explaining the rationale for the bill, the bill’s cosponsors note that under current law, the cost of prescription drugs, insulin, and most out-of-pocket healthcare costs may be included as a deductible medical expense, while OTC medicines cannot.

“American consumers, who already pay astronomical drug prices, should not be punished when their medicines transition from prescription to over-the-counter status. Under current law, the minute a medicine switches from prescription to over-the-counter (OTC) status it is no longer a tax deductible medical expense. This legislation will correct this inequity in our tax code and help millions of American consumers, particular low-income earners afford critical medicines,” DeMint said, adding that taxpayers in low-income brackets used the medical expense tax deduction much more frequently than taxpayers in high-income brackets.

>In September the US Treasury Department and the Internal Revenue Service (IRS) published Revenue Ruling 2003-102, which clarified that employer reimbursements of employee health expenses for nonprescription drugs, including reimbursements through health FSAs and Health Reimbursement Arrangements (HRAs), can be excluded from income like other employer reimbursements of employee health expenses (see  FSA Paybacks Now Cover Non-Prescription Drugs ).   The OTC bill was designed to expand on the IRS ruling, providing the tax savings to millions more Americans by allowing OTC medicines to be included as a deductible medical expense, according to its sponsors.  

“This bill will take an important step forward in making high health care costs easier to manage,” said Slaughter. “As more drugs shift from prescription to over-the-counter status, it is imperative that the tax code keeps up. Patients with conditions that require the regular use of over-the-counter products should not be penalized….It makes no sense that if a doctor prescribes a smoking cessation program the cost is tax deductible, but if a smoker seeks treatment on his or her own with an over-the-counter medicine that cost is not. Nor does it make sense that a drug like Claritin was tax deductible when it was available through a prescription, but ceased to be tax deductible the moment it became available as an over-the-counter medicine.”

>Congress should encourage preventative and cost effective care, not penalize consumers for choosing less expensive and less complicated options. In a health care system dominated by perverse incentives, this is an easy perverse incentive to get rid of,” DeMint said.

>He also noted that, according to the most recent economic data, more than five percent of taxpayers claimed the medical expense deduction in 2000. Of those taxpayers, more than half (56%) earned less than $20,000 per year, while 35% earned between $20,000 and $30,000 per year.