Coverage Effects of Limiting the Tax Exclusions for Employment-Based Health Insurance

The U.S. federal tax system provides preferential treatment for employment-based health insurance. Premiums paid by employers for health insurance are excluded from employees’ taxable income and are thus exempt from federal income and payroll taxes. In addition, the vast majority of employees can pay their share of premiums with pretax earnings. By pooling risks within groups of workers and their families, and by reducing the administrative costs of marketing insurance policies and collecting premiums, employment-based health insurance is a relatively efficient way to provide coverage—even apart from the tax preferences. However, such preferences give employment-based insurance an additional advantage. About two-thirds of the nonelderly population in the U.S. was covered by employment-based private health insurance in 2012.^[1]

Prior to the implementation of the Affordable Care Act (ACA), most estimates of the effect of eliminating this subsidy predicted substantial increases in the number of people without health insurance.[2] The reduction in coverage from eliminating the exclusions is likely to be smaller after the ACA is implemented because the ACA expands eligibility for Medicaid, establishes new health insurance exchanges where some people may qualify for premium and cost-sharing subsidies, requires individuals to have insurance coverage or potentially be liable for a penalty tax, and requires employers with more than 50 full time employees to offer affordable insurance to their employees or potentially be liable for a penalty tax. The ACA also established guaranteed issue, rating rules, and other provisions that make individual coverage both inside and outside the exchanges accessible even to those with pre-existing health conditions.

This paper will use the Health Insurance SIMulation (HISIM) model, which was developed by the Congressional Budget Office in collaboration with the staff of the Joint Committee on Taxation, to estimate the effects of limiting the tax preferences for employment-based coverage. Altering the tax exclusions for employment-based health insurance would change the relative price of employment-based coverage compared to coverage purchased in the non-group market both inside and outside the new health insurance exchanges. The model takes into account how these changes in price affect employer and employee behavior (insurance offering and take-up rates) and estimates changes in coverage by family poverty level. The authors will present the results of several alternatives:  capping the tax exclusion for federal income tax purposes; completely eliminating the tax exclusion for federal income tax purposes; and completely eliminating the exclusion for both federal income and payroll taxes.[3] The paper will include projections by poverty status of the number of people who are anticipated to leave employment-based coverage, move to plans in the exchanges or to Medicaid, or remain uninsured.

 

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[1] U.S. Census Bureau, Current Population Survey, 2011 Annual Social and Economic Supplement.

[2] See for example Jonathan Gruber, “The Tax Exclusion for Employer-Sponsored Health Insurance,” NBER Working Paper No. 15766 (February 2010).

[3] These simulations assume that the employer responsibility payments and the federal excise tax on high-premium health plans that were established in the Affordable Care Act will be eliminated in conjunction with the tax changes being modeled.

See more of: The Group Insurance Tax Exclusion
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