Tax Expenditure from Employer-Based Health Benefits Hits $785.1 Billion, 2014-2018

How much tax revenue does the Treasury lose by exempting employer-based benefits from households’ taxable income? $785.1 billion over the next five years, according to the latest estimate by the Joint Committee on Taxation.

To put that in perspective, Obamacare’s exchange premium tax credits and cost-sharing subsidies are reckoned to amount to $276 billion over the same period. So the exclusion of employer-based benefits from taxable income costs 2.8 times more than the Obamacare tax credits.

I anticipate your objections: Yes, the exclusion is not a subsidy, whereas the Obamacare payments clearly are. Nevertheless, if everyone received the same tax credit, it would be a lot fairer and easier to navigate than taxing high-income households via Uncle Sam’s left hand to fund Obamacare subsidies (not to mention Medicare and Medicaid) for other households; and then giving them a significant tax break via Uncle Sam’s right hand for their own health benefits. A universal, refundable tax credit for every household would simplify our healthcare finances dramatically.

Comments (12)

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  1. Don Levit says:

    The employer subsidies are the largest tax break – far surpassing retirement and mortgage interest deductions
    The same subsidies should be eligible for individual insurance
    Subsidies on the public exchanges are more dangerous fiscally for they come out of thin air
    At least with the employer exemption there is income in which to exempt versus magically subsidizing on average 75 percent of the premium on public exchanges
    I believe this 25 percent paid by individuals will grow much faster with the subsidies than without
    Don Levit

  2. Devon Herrick says:

    With that much tax expenditure, one would think that we could get a much better system of health insurance subsidies than the convoluted one we have.

  3. Barry Carol says:

    I would rather get rid of the tax preference for employer provided health insurance as part of broad based tax reform that would lower marginal income tax rates and increase the standard deduction. Let people buy health insurance with after tax dollars like they do for every other type of insurance. Maybe then they’ll be more price sensitive and start to care about the cost of not just health insurance but healthcare as well.

    I don’t have a problem with subsidies for lower income people as long as we have a robust income verification process, we don’t subsidize illegal immigrants and there are stiff penalties for those caught cheating the system.

    • Thomas says:

      “Maybe then they’ll be more price sensitive and start to care about the cost of not just health insurance but healthcare as well.”

      I feel this is a very valid point. If health insurance and healthcare is treated like any other service, the market would less convoluted and more efficient.

    • Bart I. says:

      Where individually underwritten insurance is concerned, I agree with Barry.

      We’ve backed into a system that effectively subsidizes community-rated coverage obtained through an employer. The tax break more-or-less reimburses healthy workers for participating. But it’s sloppy and discriminates against people in low tax brackets and those with no access to employer coverage.

      I suppose it’s up to society to decide whether this cost shifting mechanism is desirable. If it’s not, or if we can’t make it more rational and fair, then we should scrap it altogether and reduce tax rates.

  4. Barry Carol says:

    If the value of employer provided health insurance were taxable and aggregate wages were raised by the current value of the employer’s contribution toward insurance, there would need to be a mechanism for translating the value of that contribution to the individual employee level in a way that is consistent with the workings of the individual insurance market. Most employer plans currently base their employee contribution on pure community rating (1 to 1 age rating band) whereas in the individual market under the ACA, there is a maximum age rating band of 3 to 1.

    • Bart I. says:

      Small business plans, at least in California (and I believe Texas), are definitely age banded. So this inconsistency already exists.

  5. Bob Hertz says:

    Although I am intrigued by the idea of the universal uniform tax credit, I have looked in vain for documentation on how to pay for the darn thing.

    If we give a $5000 credit to every family and a $2000 credit to every single person, and if unused credits are given to safety net institutions ( a great idea from John Goodman), then the cost to the federal treasury has got to be close to $400 billion a year.

    As shown in this post, the offsetting revenue by taxing corporate paid premiums is about $160 billion a year. ( and this amount would go down as corporations dropped coverage for employees.)

    How does this not balloon the deficit? I had this same concern back in 2008 incidentally when McCain proposed a universal tax credit.

    • Barry Carol says:


      I think you’re correct; the tax credits would not be close to paid for by taxing employer provided health insurance. Roundly 150-160 million currently get their health insurance through an employer and another 15-20 million bought coverage in the individual insurance market prior to the passage of the ACA. I don’t think the tax credit model would work well for either families or older people who would have to buy insurance based on a 3 to 1 age rating band or for smokers who would be subject to a significant premium surcharge.

      I think the most viable alternative if employers stopped offering health insurance and raised taxable wages by the aggregate equivalent of what was previously spent on health insurance would be to follow the ACA model and subsidize people depending on their income level. Under the ACA those with incomes between 250% and 400% of the federal poverty level (PFL) income must pay 9.5% of their income toward insurance premiums before the subsidy kicks in. I would extend subsidy eligibility beyond 400% of the FPL but would probably raise the contribution requirement to 10%-11% of income above 300% of the FPL. I assume the Medicare and Medicaid programs would remain in place and we would need strict income verification protocols to minimize cheating. In Switzerland, where everyone buys their own health insurance policy with a maximum deductible of 2,300 CHF ($2,530) and there is no such thing as Medicare or Medicaid, 45% of the population qualifies for a subsidy.

      About 30% of the U.S. population is already on Medicare or Medicaid or both. We would probably wind up with 50% of our population qualifying for subsidies including those on Medicare and Medicaid but lots of people would probably buy less generous and less costly coverage than their employer provided because they would presumably be more price sensitive when purchasing coverage themselves with their own money. In the end, though, a tax increase might still be required to make it all work.

  6. Bob Hertz says:

    As you say this is not easy.

    In your hypothetical model, everyone in a company would get a pay increase, but only some would use that increase to buy health insurance.

    This will probably create anti selection on steroids in the individual insurance markets.

    For the last 30 years we have seen the disappearance of mandatory pensions, and the rise of voluntary 401K and sep-IRA plans.

    The results in terms of overall retirement security are not encouraging. I can well understand the push for individual choice, in many areas of economic life.
    The problem is what to do when people (and a lot of people) make bad choices. The effects of bad choices can cascade down the generations.

    • Barry Carol says:

      The purpose of mandates to buy health insurance is to avoid or at least minimize adverse selection. The Swiss don’t seem to have any problem getting everyone covered with their mandate to purchase insurance coupled with subsidies for those who can’t afford to buy it without them. We need people to buy health insurance to avoid free riders and we will have plenty who won’t buy it without a mandate. Even Mitt Romney recognized that fact. I’m all for freedom and liberty but there are limits.

      There is no mandate for employers to provide matching 401-K contributions or even to offer 401-K plans in the first place or, if they do, for employees to participate. It’s a different situation entirely. At least people have social security and, while, it isn’t meant to sustain them in retirement by itself, a surprisingly large number of people live dependent on social security for 90% or more of their income.

      A former neighbor of mine moved earlier this year to a retirement community near Orlando, FL. She and her husband will be able to live comparatively comfortably on social security coupled with the proceeds from selling their modest home in NJ whereas they couldn’t make it in NJ due to our high property taxes. It can be done and a lot of people are doing it.

      Participation in social security, by the way, is mandatory except for some public sector groups who were exempted early on. They have extremely generous pensions provided by state and / or local governments instead.

      • Bart I. says:

        I think Mitt Romney had a valid excuse to fall back onto mandates. States can’t afford the kind of tax incentives used by the federal government, e.g. to coerce people to take employer-sponsored insurance when it is offered.

        A federal tax credit for individuals purchasing HIPAA Title I-compliant coverage (putting it on a level playing field with employer-based coverage) could have accomplished what the ACA does without individual mandates and penalties and without outlawing individually-underwritten insurance for those willing to forgo the tax credit.

        That’s not something a state could do on its own, although it could top up any federal incentive to make it more effective or to compensate for additional regulations.