Health Reform: does limiting the exclusion for employer-provided insurance make sense?

by Linda Beale

[also posted on ataxingmatter]

Both President Obama and Senator Max Baucus, key players in the health reform debate, have now indicated that one source of funding for health care reform on the table is a possible limitation in the exclusion from income of employer-provided insurance. See, e.g., Connolly, President Pivots on Taxing Benefits: Obama is Willing to Consider Move to Gain Health Reform, Washington Post, June 3, 2009.

The immediate reaction (seen in the comments section on the cited article) is rejection of this alternative. After all, many of us rely heavily on the fact that we have health insurance through work, and those of us in the lower income brackets probably would not be able to afford health insurance (at least, under the current privatized system) without that benefit.

But is the populist response the right one? We should not lose sight of the fact that the employer-provided insurance exclusion is the biggest tax expenditure in the Code that, like most tax expenditures, also tends to benefit most the highest income individuals. The Center on Budget and Policy Priorities has put out a new report titled Limiting the Tax Exclusion for Employer-Sponsored Insurance Can Help Pay for Health Reform that addresses this question directly. The Center notes that the tax expenditure is “poorly targeted” and benefits most the high income group who “least needs help paying for health insurance.” Lower-income taxpayers get less from the benefit because they may not have jobs, even if they have jobs they may choose to forego participation because of the cost of their share of the premium, and even if they participate, they get less of a benefit (in absolute dollar terms) because their tax rate is lower.

Here’s the graph showing the benefit relative to the income group.

CBPP suggests that the exclusion can be reformed without eliminating the value of employer-provided health insurance. One of the concerns is that employers will no longer provide the benefit if it becomes taxable, but a “play or pay” requirement could discourage that option and mitigate its effects. CBPP suggests that concerns about a rigid cap that would apply in all cases can be mitigated by adjusting the cap when a firm is relative small (so that more goes to administrative costs) or has more older and sicker workers (so that more health care costs must be covered) and for other, similar issues. The paper provides three specific alternatives for structuring the limitation in order to promote the goal of universal health coverage.

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