One of the least-discussed – and most valuable – tax breaks is receiving closer scrutiny lately, as the federal government looks for ways to reduce the deficit and reform health insurance policy.
That’s the tax break on contributions made by businesses to pay for employee health insurance plans. Estimates of the value of the tax break place it between $185 billion and $250 billion per year, which make it by far the largest tax break in the U.S. tax system. By comparison, mortgage interest tax breaks are worth a total of some $100 billion per year.
The Patient Protection and Affordable Care Act (PPACA) includes a provision that taxes “Cadillac” plans that cost more than $10,200 for an individual or $27,500 for a family starting in 2018. There’s been little or no talk of extending taxation to lower-cost employer-sponsored health plans. When it was first enacted just after World War II, the tax break was barely debated, swept in along with a variety of other measures that were protected from wage and price controls. Since then, both employers and employees have forcefully opposed reducing the break, keeping it off the table as a means of raising revenue.
Until now, that is. Lately, there’s been an uptick in attention to the large tax break. Here are a few examples:
- On December 5, political commentator David Brooks repeated a common argument for lowering the break on insurance benefits in an interview in the New York Times Opinionator blog. He said, “I would definitely cap the health insurance benefits deduction. That nasty thing encourages wasteful and excessive health care spending because you essentially get a health care subsidy from your employer tax free instead of getting your money in plain old salary, which is taxed.” (Note that the interview is somewhat sarcastic in tone, but Brooks’s suggestion is serious and echoes many economists’ critique of the tax break.)
- National Public Radio aired a segment on December 3 in which it said that many economists agree that “excluding the value of health insurance from federal taxes is nuts.” You can read a summary of the piece on the NPR website.
- Fiscal Times recently included the tax break in its “Top 10 Tax Breaks That May Be Eliminated”.
What might result from decreasing or eliminating corporate deductions for health insurance? One possibility is that employers could push down the costs of health care coverage to employees, offering insurance plans that cover less, asking for higher contributions from employees for premiums, or asking for higher copays and deductibles. Another is that employers might simply stop offering coverage altogether. Or there may be a middle ground involving defined contribution plans that amount to less than the amounts employers contribute to health care coverage, reducing their tax burdens but still helping employees purchase insurance.
The latter two outcomes could influence individuals to use the health care exchanges mandated under the PPACA, which are due to come on line next year.
A different kind of outcome could emerge, as well: lowering or ending the health insurance tax break could spare Medicaid and Medicare from larger cuts.
Discussions about reducing the tax break on company-funded health insurance – and its consequences — can be expected to increase, given the urgency of the need for solutions to U.S. fiscal issues and the size of the tax break. We’ll monitor the discussion and provide further analysis here.