October 11, 2023
Current tax rules permit employers to deduct their expenses for employee health care from corporate income just as they deduct employees’ wages and salaries as ordinary business expenses. Also, employees can exclude the value of these contributions from their income for tax purposes and use pre-tax dollars to pay for their share of the cost. According to the Congressional Budget Office (CBO) in 2023, estimated lost federal revenue due to the tax-exclusion of employer-sponsored coverage was $326 billion. Periodically, as Congress looks to raise revenue for new programs (whether or not health care related) a common area cited as a potential “pay for” is changes to the tax status of employer sponsored health coverage.
Some states and localities (e.g., San Francisco) have enacted taxes on employer-sponsored coverage to fund coverage expansion, Medicaid budget shortfalls, exchange-stabilizing reinsurance programs and other purposes.
Congress should maintain the current tax treatment of employer-sponsored coverage. It is where most Americans get their coverage, is heavily subsidized by employers, and is highly valued by employees.
Eliminating or limiting the tax-free status of health coverage would not in and of itself be an improvement to the cost or quality of the health care system and would severely raise costs for working Americans and their employers who provide health coverage. Congress should instead focus on balanced reforms and improvements, including but not limited to addressing supply-side drivers of medical and prescription drug inflation, unnecessary administrative burden, provider labor shortages and training impediments, cross-state licensing issues, excessive market power and arbitrage, and substantial waste which unnecessarily drive-up costs for employers and employees.
Additionally, states and localities should not exacerbate the health care cost problems and disincentivize robust plan offerings by taxing the health benefits for employers, employees and other plan participants.
WHY IT MATTERS
- Any tax that raises the cost of health benefits will harm the more than 155 million Americans who rely on and value employer-sponsored health coverage (CBO, 2023).
- The tax advantages for employer-sponsored coverage help make health care more affordable for employees and their families and encourage employers to invest in health benefits and help maintain and promote population health and wellbeing.
- State and local taxes on employer plans increase employers’ and employees’ costs without providing additional benefits to employees. These taxes increase employers’ administrative burden through increased local compliance complexity.
- Congress often focuses on demand-side policy changes in order to affect change in health care broadly. This tends to increase costs and administrative burden on employer plans and other payers and not yield meaningful improvements to quality or cost-containment/sustainability. Congress must look to supply-side improvements and reforms in order to address underlying cost and quality concerns.
More TopicsPolicy & Advocacy Health Benefits Taxation
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TransparencyTransparency Policy Position Statement
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HSAsHealth Savings Accounts (HSAs) Policy Position Statement
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Paid LeavePaid Leave Policy Position Statement