The voices of Tax Policy Center's researchers and staff
The tax break for employee-sponsored health insurance is the Rodney Dangerfield of the Internal Revenue Code. It gets absolutely no respect.
I spent all day at a TPC conference listening to tax and health care policy experts of all political stripes bash the huge subsidy—worth more than $200 billion-a-year in reduced income and payroll taxes. As it stands, the law allows workers to exclude the value of this insurance from wages, thus making the benefit tax free. In contrast, those who buy individual insurance generally get no tax break to help offset their costs.
Conservatives dislike this system because it discourages people from buying insurance on their own. Progressives trash it because it benefits high income workers far more than their low-wage colleagues. Tax and health policy experts are offended because it encourages workers to buy more insurance than they need—and thus spend more medical care dollars for little added health benefit.
Overall, it has little to recommend it—except for one small thing: it is the financial underpinning of an employee sponsored health system that covers nearly 90% of all privately insured people. So that leaves the policy experts with a big question: What should Washington do instead? To make it even more difficult, no one really knows what would happen if the tax break is repealed.
There are a half-dozen alternatives on the table. We could keep the current exclusion for employer coverage, but add a deduction for those who buy individual insurance. We could replace the exclusion with a deduction. Or replace it with a credit for all, including those with individual coverage, an idea favored by John McCain. Unlike a deduction, which would be more beneficial to high-income workers (who presumably need it least) the credit would target lower wage workers.
While these solutions may make better tax policy, it is not clear they would create a well-functioning individual market. That feat would require still more politically challenging reforms. And some economists, such as Jeff Liebman and Richard Zeckhauser, argue that buying health insurance is so complicated that most people need some entity to help them, such as an employer or even the government.
The Congressional Budget Office figures about 7 million workers would lose employer-based insurance if the exclusion were replaced by a deduction for all, including individual buyers. However,14 million would buy in the individual market, thus lowering the number of uninsured by about 7 million. But what kind of insurance could they get? Would some be frozen out because of pre-existing conditions? The answers are uncertain at best.
And that leads inevitably to a debate over the next big step—a government mandate, such as the one proposed by Hillary Clinton or the one now operating in Massachusetts, or a slightly less dramatic reform plan offered by Barack Obama. TPC fellow Jason Furman would replace the exclusion with a combination of a refundable tax credit and broad insurance market reforms.
Bashing employer-sponsored insurance is easy. The hard part, I heard today, is figuring out what comes next.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.