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Tax Exclusion For Health Benefits Could Be Part Of ‘Fiscal Cliff’ Talks

By Julie Appleby

December 14th, 2012, 2:53 PM

As the deficit debate continues, some policy wonks think it’s inevitable that negotiators will address a loophole that allows workers to avoid paying taxes on the value of their job-based health insurance.

Photo by Karl Eisenhower/KHN

“The No. 1 tax expenditure is employer-provided health insurance,” said G. William Hoagland, a senior vice president at the Bipartisan Policy Center, who spoke Thursday at a conference sponsored by the Employee Benefit Research Institute. “There’s no way on God’s green earth … that we will not see that exclusion on the table.”

Congress and the White House are looking for ways to avoid automatic spending cuts and tax increases that will take effect Jan. 1 if no deficit reduction deal is reached. Ideas have included raising the eligibility age for Medicare, charging wealthier seniors more for their coverage, allowing tax cuts to expire – or closing some tax loopholes.

By far the largest cost to the Treasury is the exclusion that allows workers who get job-based insurance coverage not to pay taxes on the value of those policies and employers to deduct the cost as a business expenditure.  The exclusion costs the Treasury an estimated $246 billion annually, according to Congress’ Joint Committee on Taxation,  dwarfing the second-largest break, the mortgage interest deduction, which costs an estimated $98 billion.

But eliminating the tax exclusion would be wildly unpopular among workers, since it would raise their taxes. Even though employers would still be able to deduct the cost of paying for health insurance as a business expense, some might drop health coverage if they thought workers valued the benefit less because they now had to pay taxes on it.

“In the past, before the federal Affordable Care Act, it was assumed that (changing) the tax exclusion would increase the number of uninsured,” said Hoagland, a former staff director of the Senate Budget Committee and senior vice president at insurer CIGNA. “I would argue that (concern) now goes away,” because the health law provides subsidies to help lower income Americans buy coverage.

At least a few lawmakers might regard changing the tax exclusion as politically easier than reducing payments to hospitals and other medical providers, said Steve Wojcik, a vice president of public policy at the National Business Group on Health, who was also on the panel.

Some economists think that reducing or eliminating the tax exclusion would slow spending on health care because it would prompt employers to choose less generous insurance plans that cost less. Others say the savings would be small. Several attempts to revise or cap the exclusion have failed in the past two decades.

The issue is already addressed in the 2010 health care law – but it doesn’t take effect for another six years. The law imposes a 40 percent excise tax on health plans that cost more than $10,200 for individuals, or more than $27,500 for a family, starting in 2018.

3 Responses to “Tax Exclusion For Health Benefits Could Be Part Of ‘Fiscal Cliff’ Talks”

  1. larry says:

    No doubt about it! Eliminating tax exclusions for employer provided healthcare benefits sounds like a Republican idea if you ask me. More of their “race to the bottom” mentality. More sour grapes that they didn’t get the credit for Obamacare and a mandate idea that the ultra-conservative Heritage Foundation invented back in the early 1990′s. The exact same idea that Mitt Romney got passed and enacted in 2006 in Massachusetts. Rather than promoting universal tax exemptions for every dollar Americans spend on the most expensive healthcare system the world has ever known, Republicans would rather target hard working middle-class Americans and tax them, as ordinary income, on their employer provided benefits. This idea has “Republican” written all over it! GOP morons!

  2. Ted says:

    In extending the eligibility age and increasing Medicare premims, Congress and the Presdent do make high income seniors pay more for Medicare, they need to also “explicitly” include an option for those seniors to opt out of Medicare and buy private insurance. Medicare coverage is in reality not very good or efficient and given that under the ACA the high income senoris are crrently already hit with paying $250-350 per month just for there high income Part B premium plus an additional adjustment for their income adjusted Part D coverage premium, it seems that if they are required to pay even more, they should be able/allowed to privately purchase coverage elsewere which would be better. However, Medicare rules do not seem to allow/encourage this.

  3. Bruce Thevenot says:

    Bill Hoagland is on to something here. No need to wait until 2018.

    While I would prefer that Congress consider eliminating the tax exclusion for employer-paid group health premiums and replacing it with a schedule of individual tax credits graduated by income (including a refundable credit for low-wage workers), it does not make sense to ignore the option of capping the present exclusion at something like the cost of a reasonable benefit plan in one’s area.

    Far from being a “Republican idea” as clueless Larry opines, Democrats should be the first to raise this issue. Why? Because the present tax exclusion is glaring regressive; i.e., its value is magnified for upper income earners in the top tax bracket, while having much less value for other workers. It is only their hostage status to unions that prevents Democrats from considering what to them should be a natural preference.

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