HomeHealth Care NewsTax Exclusion for Employer-Sponsored Health Insurance in the Spotlight

Tax Exclusion for Employer-Sponsored Health Insurance in the Spotlight

Experts criticized the federal tax exclusion of employee health benefits from a variety of perspectives at the Cato Institute.

Panelists addressed the question, “Should Congress End the Tax Exclusion for Employer‐​Sponsored Health Insurance?” at a Cato policy forum in Washington, D.C., on March 31.

Employers in Charge

The exclusion of employer-provided health insurance from federal income and payroll taxes saved workers $352 billion in additional taxes in 2022, said one of the speakers, Michael F. Cannon, director of Health Policy Studies at the Cato Institute.

Including employee contributions, these health plans control $1.3 trillion in workers’ income, said Cannon.

“If we got rid of the exclusion, what would happen to the $1.3 trillion (currently) denied workers? They would make their own health care decisions,” said Cannon. “They would have more control over their incomes, transferring control from employers to employees and allowing them to purchase health insurance tax-free. They could still stay in employer-provided plans if they choose to do so.”

       The tax exclusion for health benefits is the source of multiple problems in health care, including rising prices and coverage gaps, said Cannon. “It has caused or contributed to every problem in the health care system, …” said Cannon. “It is the most damaging thing the federal government has done in health care.”

‘Leads to Job Lock’

Employment-based health coverage also reduces workers’ job mobility, said Brian Blase, president of the Paragon Health Institute, who moderated the panel discussion.

 “The federal government does not tax health coverage,” said Blase. “About half of all Americans receive their health care through their employer … This leads to job lock, in which people stay in their jobs because they fear they will lose their health care.”

Furthermore, employees do not benefit equally from the tax exclusion, said Cannon.

“The exclusion is regressive, with people of higher incomes benefitting more from the tax break than low-income wage-earners,” said Cannon.

Options for Reform Offered

Blase said the options for reforming the tax exclusion, or eliminating it altogether are to replace it with a standard deduction (up to a certain amount, premiums wouldn’t be subject to taxation), a uniform refundable tax credit for health insurance which could be adjusted based on age and, or income, or offered as a rebate to lower-income households,

The third option, favored by Cannon, is a “large” health savings account, in which the employer would put the money they would spend on health insurance into a tax-advantaged account that the employee would control. The employee could purchase the employer plan or seek other health coverage options.

A May 2022 study by Cannon suggests the tax-advantaged amount would have to be calculated (i.e. capped) to be revenue neutral and should remove the insurance requirement currently in place for HSAs, “so that taxpayers can pair an HSA with any type of coverage.”           Cannon notes that HSAs have broad political support and that the average amount spent by employers on health premiums each year is $16,253.

‘Gold-Plated Plans’

The tax exclusion as it stands now encourages overly generous coverage, said Amy Finkelstein, an economics professor at the Massachusetts Institute of Technology.

 “[W]orkers are getting health insurance at less than cost,” said Finkelstein. “People on the margins would rather have the extra cash. If the exclusion were eliminated, there would be fewer gold-plated plans.”

 Separating the issue of eliminating the tax exclusion from that of employer-supported health insurance is critical, said Finkelstein. “You can support employer-provided health insurance, which I do, and still oppose the exclusion,” said Finkelstein.

Employer Inertia

Many employers continue to support the exclusion, said Richard Hinz, a senior advisor to the American Benefits Council, a group representing corporate employers.

  “Employers support it for reasons of inertia,” said Hinz. “There is a benefit from the standpoint of the business. Employers want to bind the employees to the firm. They are benefitting from their workers’ ties to the firm. If the exclusion went away, where would employees go for their health insurance? It would be the wild west.”

   Employees also benefit from employer-provided health care due to their purchasing power, said Hinz. “Acting as agents, businesses have real leverage in the marketplace to negotiate better coverage,” said Hinz.

‘Somebody Will Have to Pay’

The Affordable Care Act (ACA) is another alternative, said Jason Furman, former chairman of the Council of Economic Advisers during the administration of President Barack Obama and an economics professor at Harvard University.

“The ACA provides an affordable option,” said Furman. There was less “employer drop” (employers terminating health coverage after enactment of the ACA) than the Congressional Budget Office (CBO) had projected, said Furman.

As for allowing people to buy health insurance with pre-tax, not post-tax dollars, Finkelstein says there needs to be a limit.

“I don’t think we should be privileging health insurance on the margin,” said Finkelstein.

“You have to close the budget somewhere because if we’re making health insurance tax free that is going to come out of somebody’s wages.”

Bonner Russell Cohen, Ph.D. (bcohen@nationalcenter.org) is a senior fellow at the National Center for Public Policy Research.


Internet info:

Should Congress End the Tax Exclusion for Employer-Sponsored Health Insurance?” Cato Institute Policy Forum, March 31, 2023

For related articles, click here.

Bonner R Cohen
Bonner R Cohen
Bonner R. Cohen is a senior fellow with the National Center for Public Policy Research, a position he has held since 2002.


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