Employer Tax Exclusion

• See Employer Tax Exclusion under Health Financing, for estimates of the annual tax expenditures associated with making employer-provided health benefits nontaxable.
• Tax Exclusion (Health Affairs search)

Reform Proposals

• Jason Furman. Health Reform Through Tax Reform: A Primer. Health Affairs, May/June 2008; 27(3): 622-632. [Abstract] This paper surveys a range of proposals to reform health care, either by adding new tax incentives or by limiting or replacing the existing tax incentives. Replacing the current tax preference for insurance with an income-related,refundable tax credit has the potential to expand coverage and reduce inefficient spending at no net federal cost. But such an approach by itself would entail substantial risks, so complementary reforms to the insurance market are essential to ensure success.
• Lisa Clemans-Cope, Stephen Zuckerman and Roberton Williams. Changes to the Tax Exclusion of Employer-Sponsored Health Insurance Premiums: A Potential Source of Financing for Health Reform (Urban Institute, June 2009). In this paper, we discuss the revenue and distributional consequences of several policy options that would alter the ESI tax exclusion. We focus on two specific policy design elements: (1) a cap, or dollar limit, on the amount of employer-sponsored health insurance premiums excluded from taxable income; and (2) an index that determines how this cap might grow over time. We present first year (2010) and 10-year (2010-2019) revenue estimates for all options and distributional impacts in 2019 for selected options. The distributional impacts include income and payroll taxes even though payroll tax revenue would not be available to fund health reform, because any decreases in benefits resulting from the tax changes would eventually return to workers as higher wages that would be subject to both types of taxes.
• Lisa Clemans-Cope, Stephen Zuckerman, and Dean Resnick. Limiting the Tax Exclusion of Employer-Sponsored Health Insurance Premiums: Revenue Potential and Distributional Consequences. Washington, D.C.: Urban Institute, May 2013. In this brief, we provide estimates of the revenue potential and distributional consequences of a new policy option. The policy we analyze here would impose a cap, or dollar limit, on the aggregate cost of employer-sponsored health coverage excluded from income and payroll taxes. The cap would be set at the 75th percentile of the sum of premiums and other medical benefits, and would be indexed, or allowed to grow over time, by a five-year average of the rate of GDP growth.  We show that the 75th percentile tax cap would produce $264.0 billion in new income and payroll tax revenues over the coming decade while still preserving 93 percent of the tax subsidies available under the current policy. Across all tax units, 15.7 percent would pay higher taxes under the 75th percentile cap on the exclusion of premium and medical benefits in 2014, with this share increasing to 20.0 percent by 2023. Although tax units across the entire income distribution would experience some tax increases, these increases are considerably smaller and less prevalent at lower income levels.
• L. Batchelder, F. Goldberg, and P. Orszag, “Efficiency and Tax Incentives: The Case for Refundable Tax Credits,” Stanford Law Review 59, no. 23 (2006): 23–76.
• National Commission on Fiscal Responsibility and Reform (Bowles-Simpson). The Commission proposed that a reduction of the income tax exclusion for employer-provided health insurance be part of a fail-safe plan that would automatically be triggered if legislation were unable to satisfy specified targets for federal funds. In particular, the commission offered an illustrative proposal that, when fully phased in, would cap the tax exclusion at the 75th percentile of premium levels in 2014, with no indexing of the cap through 2018 and a gradual phase-out of the tax exclusion by 2038. The commission also recommended reducing the Affordable Care Act’s excise tax rate to 12 percent, rather than 40 percent. National Commission on Fiscal Responsibility and Reform. The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform. Washington, DC: The White House, December 1, 2010.
• Debt Reduction Task Force (Rivlin-Domenici). The Task Force proposed a plan to cap and phase out the tax exclusion. The task force proposal would cap the tax exclusion at the 75th percentile of premiums (including dental and vision coverage) in 2018 and eliminate new contributions to health savings accounts, another tax-free vehicle for health care spending. The cap would be phased out over a 10-year period. However, for collective bargaining agreements signed prior to the date of enactment, the proposal would not apply over the life of the contract. The Debt Reduction Task Force, Restoring America’s Future, Washington, DC: Bipartisan Policy Center, November 2010.

“Cadillac Tax”

• The Affordable Care Act provides for a 40 percent excise tax on health plans that exceed a certain cost threshold.
• Edmund F. Haislmaier. Kerry’s Excise Tax on “Gold-Plated” Health Insurance Policies. Heritage Foundation WebMemo #2578, August 5, 2009. [Full Text (html)]
• Joe Antos. Obama Targets Wrong Tax for Health Reform, May 30, 2009. [Full Text (html)]
• Also see Excise Tax on Comprehensive Health Insurance Plans (Cadillac Tax).