Health Insurance and Taxes: Can Changing the Tax Treatment of Health Insurance Fix Our Health Care System?

September 2007
EBRI Issue Brief #309
Paperback, 28 pp.
PDF, 840 kb
Employee Benefit Research Institute, 2007

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Executive Summary

Tax treatment of health benefits: This Issue Brief examines fundamental tax reform as it relates to employment-based health benefits and health insurance.

Health benefits a big potential target for raising revenue: President Bush’s FY 2008 budget estimates all employee benefits-related "tax expenditures"  (government revenue foregone due to special tax treatment) will amount to $328 billion next year, or 34 percent of the $961 billion worth of total tax expenditures in the federal budget. Tax-favored employment-based health insurance benefits account for the largest single tax expenditure: almost 17 percent of the total amount and almost 49 percent of all employee benefits-related tax expenditures.

Politics of taxes: Although the current Congress is expected to ignore President Bush’s 2007 State of the Union proposal for fundamentally changing how health insurance is taxed, his concept is certain to survive the end of his administration. Bipartisan tax plans have been introduced in the Senate, and several 2008 presidential candidates have proposed overhauling the taxation of health benefits.

Winners and losers? These proposals would affect those with coverage through an employer, those who purchase coverage on their own, and those who are uninsured. They include:

   --> A tax cap and employment-based benefits—“Capping” employers’ tax deductions for health coverage, and/or workers’ tax exclusion for health care benefits, could mean the end of employment-based health benefits. A tax cap would mean a tax increase for some individuals, and the tax increase could be driven by health status and geography more than it is driven by the comprehensiveness of insurance.

   --> Tax caps and cost containment—The cap on workers’ tax exclusion for health insurance probably would not have much impact on the comprehensiveness of health benefits, at least initially. Over time, the impact of the cap on the tax exclusion should grow as long as insurance premium growth exceeds overall inflation, but it could be many years before the higher taxes are a large enough burden to drive people toward less comprehensive benefits.

   ---> Tax credits and the uninsured—The ability of a tax credit to reduce the uninsured depends heavily on several key design issues, such as the size of the tax credit relative to income and income levels overall. Previous research has shown that even very generous tax credits might not be large enough for a major portion of the low-income population to buy health insurance.

Impact on the uninsured—Estimates vary widely on how tax treatment changes would affect the level of uninsured Americans, with advocates claiming between 3–9 million fewer uninsured as a result. Even if achieved, more than 40 million individuals would still have no health insurance.