The power of genetic association studies to identify disease susceptibility alleles fundamentally relies on the variants studied. The standard approach is to determine a set of tagging-SNPs (tSNPs) that capture the majority of genomic variation in regions of interest by exploiting local correlation structures. Typically, tSNPs are selected from neutral discovery panels - collections of individuals comprehensively genotyped across a region. We investigated the implications of discovery panel design on tSNP performance in association studies using realistically-simulated sequence data. We found that discovery panels of 24 sequenced ‘neutral’ individuals (similar to NIEHS or HapMap ENCODE data) were sufficient to select well-powered tSNPs to identify common susceptibility alleles. For less common alleles (0.01–0.05 frequency) we found neutral panels of this size inadequate, particularly if low-frequency variants were removed prior to tSNP selection; superior tSNPs were found using panels of diseased individuals. Only large neutral panels (200 individuals) matched diseased panel performance in selecting well-powered tSNPs to detect both common and rarer alleles. The 1000 Genomes Project initiative may provide larger neutral panels necessary to identify rarer susceptibility alleles in association studies. In the interim, our results suggest investigators can boost power to detect such alleles by sequencing diseased individuals for tSNP selection.