Health Affairs
February 25, 2004
The Cost Of Tax-Exempt Health Benefits In 2004
By John Sheils and Randall Haught
It is important to understand that the tax expenditure for health benefits accrues to workers rather than employers.
We have defined “tax expenditure” as the additional taxes that would be paid
if these benefits were included in taxable income. This depends on the marginal tax rate of the workers receiving these benefits (which varies with personal income and filer type) rather than that of the employer providing them.
We estimate that the average health benefit tax expenditure will be about
$1,482 per family in 2004. However, it is heavily skewed toward high-income
groups. The average will be $2,780 for families with incomes of $100,000 or
more per year, but only $102 for families with incomes of less than $10,000
per year. This reflects the fact that families with relatively higher incomes are more likely to have employer coverage and are in higher tax brackets.
Proposals have emerged that would replace the current health benefit tax
expenditure with a refundable tax credit. Workers would be required to count
the value of employer-sponsored health benefits as income when computing
their taxes, which would increase their incentives to enroll in less costly
health plans. A refundable tax credit of perhaps $1,500 for individuals and
$3,500 for families would be provided to all Americans and would be phased
out as income rises. This would refocus the health benefit tax expenditure
on lower-income people to help the uninsured obtain coverage. The tax credit
also would be available for all health insurance including nongroup coverage
(excluding Medigap), which does not now qualify for tax preferences.
However, these proposals raise several concerns. For example, eliminating the relative tax advantages of employer coverage could cause some employers
to stop offering coverage, assuming that their workers will purchase their
own nongroup coverage with the help of the tax credit. Without a mandate for
all to offer coverage, this could result in a partially offsetting increase
in the number of uninsured people, as the convenience and economy of employer-group coverage disappears. Also, nongroup insurance,which is difficult to obtain in many areas, is much more costly to administer than group coverage, so overall costs would increase. These problems must be addressed before these types of tax credit models can be a viable alternative.
http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w4.106
The full report:
http://content.healthaffairs.org/cgi/reprint/hlthaff.w4.106v1.pdf
Comment: Taxpayers currently are paying for health care for higher income
individuals, which is a benefit that lower income individuals do not receive. Current tax preferences for employer-sponsored plans are highly inequitable because of their regressive nature.
Several policy analysts have suggested discontinuing this inequitable tax
treatment of employer-sponsored plans, and replacing it with refundable tax
credits. Employers would welcome this opportunity to shift the responsibility for obtaining coverage to the employee who would then have to turn to the individual market. But the inequities of the individual market are much more profound than is the current tax injustice. And it is highly unlikely that standard policies could ever be established that would ensure equitable coverage and affordability within the private plan marketplace.
Why do we keep considering all of these other deficient schemes when an
equitably-funded universal system of social insurance would work just
fine?