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

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.