Deficit cutters take aim at the tax break for health insurance

By guest blogger Robert Field:

If you, like most Americans, get your health insurance through an employer, you receive a huge financial boost that you may not even be aware of. It is from the government in the form of a tax deduction for the cost of the premiums.

When your employer provides health insurance for you and your dependents, it usually pays most of the cost. Under the tax laws, this amount is excluded from your taxable income, even though it is part of your total compensation. Most people do not even realize how much their employer has paid on their behalf. The remaining portion of the premium, the part you pay yourself, can usually also be deducted from the income you report. As a result, your health insurance is funded tax free.

The tax deduction for employer-sponsored health insurance adds up to a major cost for the government. Economists estimate that the total amount of lost revenue at the federal, state, and local levels is over $250 billion a year. That is almost three times the cost of Obamacare.

A growing chorus is calling for Congress to repeal the tax break or at least to scale it back. Proponents of doing so include the leaders of President Obama’s deficit reduction commission, Erskine Bowles and Alan Simpson, and the leaders of a separate deficit reduction task force, the Bipartisan Policy Center, Alice Rivlin and Pete Domenici. Many economists believe that the tax break distorts the health care system by inducing people to purchase more coverage than they really need .

The financial burden of eliminating or restricting the tax break would not necessarily affect everyone. It could be replaced with a system of tax credits for health insurance for those with lower incomes. This would result in less lost tax revenue than the present arrangement and would focus the government’s help on those who need it the most.

Unions, some employers, and some consumer advocates stand strongly opposed. They see an unfair burden on middle class families. Without the help of a tax deduction, some of these families might be forced to drop coverage, adding to the roles of the uninsured.

Because of such opposition, it is unlikely that changes to the tax break for employer-sponsored health insurance will gain political traction any time soon. Nevertheless, this tax preference is likely to appear with increasing frequency on the hit lists of deficit cutters. Health care spending is one of the largest drivers of the federal deficit. If we are serious about bringing government budgets into balance, it will be difficult to ignore a program that reduces tax revenues by a quarter of a trillion dollars a year.

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