Employer Tax Exclusion

VI. Key Issues: Financing and Delivery >> C. Health Financing >> Health-Related Tax Expenditures >> Employer Tax Exclusion

 

History

Timeline

References

Official Estimates of Revenue Losses due to Tax Exclusion

  • Joint Committee on TaxationTax Expenditures for Health Care (2008).
  • Office of Management and BudgetTable 17-1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2011-2017. In 2013, total federal revenue losses related to tax benefits related to employer-provided health plans will amount to just over $300 billion.
    • Line item 132 lists federal income tax revenue losses related to the exclusion of employer contributions for medical insurance premiums and medical care. Footnote 16 provides the corresponding revenue losses related to FICA payroll taxes. In 2013, income tax losses were $180.58 billion, while payroll tax losses were $113.69 billion. Total=$294.2 billion.
    • Line item 133 lists federal income tax revenue losses related to the deduction for self-employed medical insurance premiums; footnote 17 reports that self-employed health insurance premiums were excludable from payroll taxes only in 2010. In 2013, income tax losses were $5.97 billion.
  • State and Local Tax Revenue Losses. There is no official regularly reported estimate of state and local income tax losses arising from the tax exclusion. In 2006, the revenue losses from state income taxes ($23.4 billion) amounted to 20.9% of the estimated revenue losses from federal income taxes ($111.9 billion). Assuming the same ratio for 2013 would imply state and local income tax losses of $37.7 billion due to the exclusion.

Analysis

  • Burman L, Khitatrakun S and Goodell S. Tax Subsidies for Private Health Insurance – Update. Who Benefits and at What Cost? Robert Wood Johnson Foundation, July 2009. [Full Text (pdf)] Policy-makers are considering modifications to the tax treatment of employer-sponsored insurers (ESI) as a way to raise revenue to help pay for health reform and provide incentives to reduce health care costs. Understanding how current subsidies work is important to assessing health reform proposals. This brief is an update of a previous synthesis report published in 2003, and presents essential information about the structure and distribution of existing tax subsidies for ESI and the implications for policy options. Federal tax subsidies for employer sponsored insurance will amount to more than $240 billion in 2010.
  • Cogan, John F.R. Glenn Hubbard, Daniel P. KesslerThe Effect of Tax Preferences on Health Spending. Working Paper 13767, January 2008.  This paper provides a good summary of previous estimates of the impact of the tax exclusion on health spending. Authors estimate that repealing the tax preference would lead to an approximate doubling of the coinsurance rate among those with employer-provided coverage who have nonzero health spending. A doubling of the coinsurance rate from 32 to 64 percent, in turn, would lead to a decline in health spending of between 13.3 percent (at the RAND experiment’s estimate of the elasticity of demand for health services of -0.2) and 46.7 percent (at Eichner’s (1998) elasticity of demand for health services of -0.7).
  • Jason Furman. Health Reform Through Tax Reform: A Primer. Health Affairs, May/June 2008; 27(3): 622-632. [Abstract] The total income tax expenditure for health insurance is $164 billion. In addition, the tax exclusion reduces payroll taxes by about $85 billion, for a total contemporaneous cost of $250 billion. This contemporaneous cost is partially offset by the fact that excluding employer contributions to Social Security from taxable earnings results in lower future Social Security benefits. Taking this into account, the net present value cost of the tax exclusion in fiscal year 2008 is about $200 billion.
  • Roger Feldman and Bryan Dowd. A New Estimate of the Welfare Loss of Excess Health Insurance. The American Economic Review Vol. 81, No. 1 (Mar., 1991), pp. 297-301. Authors calculate that the welfare loss from giving all Americans free care rather than a policy with a $1,000 deductible was $33.4 to $109 billion (1984 dollars). The authors do not attempt to calculate what share of this loss can be attributed to excess coverage encouraged by the tax exclusion.
  • John Sheils and Randall Haught. The Cost Of Tax-Exempt Health Benefits In 2004. Health Affairs Web Exclusive, February 25, 2004. [Abstract]
  • Thomas M. Selden and Bradley M. Gray. Tax Subsidies For Employment-Related Health Insurance: Estimates For 2006Health Affairs. November 2006. Shows that tax subsidy–inclusive of federal and state income taxes and Medicare/Social Security payroll taxes, amounted to 35.4% of premiums in 2006. The revenue losses from state income taxes ($23.4 billion) amounted to 20.9% of the estimated revenue losses from federal income taxes ($111.9 billion).
  • Tax Exclusion (Health Affairs search)
  • See Employer Tax Exclusion under Health ReformTax Reform for a discussion of federal or state proposals to cap or eliminate this exclusion as part of comprehensive health reform.