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A Primer on Tax Subsidies for Health Care

A Primer on Tax Subsidies for Health Care. Larry Levitt Kaiser Family Foundation December 5, 2008. Chart 1. Types of Tax Subsidies for Health Care. Health insurance subsidies Employer contributions for insurance are exempt from taxes for employees

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A Primer on Tax Subsidies for Health Care

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  1. A Primer on Tax Subsidies for Health Care Larry Levitt Kaiser Family Foundation December 5, 2008

  2. Chart 1 Types of Tax Subsidies for Health Care • Health insurance subsidies • Employer contributions for insurance are exempt from taxes for employees • Section 125 plans subsidize worker contributions • Self-employed can deduct premiums • Subsidies for out-of-pocket health care expenses • HSAs • HRAs • FSAs • Deduction for expenses >7.5% of income

  3. Chart 2 Tax Subsidies for Out-of-Pocket Health Spending • Health Savings Accounts • Minimum deductible of $1,150 single/$2,300 family; tax-free employer/individual contributions to cover out-of-pocket costs; portable and can be rolled over • Health Reimbursement Arrangements • Used with any type of plan; tax-free contributions by employers only; can generally be rolled over • Flexible Spending Accounts • Tax-free employer/individual contributions; use it or lose it • Deduction for medical expenses >7.5% of income

  4. Chart 3 Tax Subsidies for Health Insurance • Employers can deduct cost of health benefits (just like any other business expense) • Employer contributions for insurance are exempt from taxes for employees • 1943: War Labor Board rules health benefits exempt from wage freeze • 1954: Revenue Act codifies exclusion of benefits • Worker contributions can be pre-tax (125 plan) • Self-employed can deduct premiums • Otherwise, generally no subsidies for individuals buying on their own

  5. Chart 4 Example 1: Modest Income Family With and Without the Tax Exemption 15% of the premium Source: Kaiser Family Foundation calculations.

  6. Chart 5 Example 2: Higher Income Family With and Without the Tax Exemption 28% of the premium Source: Kaiser Family Foundation calculations.

  7. Chart 6 Cost of the Exemption • Acts like an entitlement • But, subsidies are “hidden” from workers and the budget • As a result, costs can only be estimatedEstimated federal cost = $224.7 billion in 2008 for active workers($134.3 billion for income taxes, $90.5 billion for payroll taxes) Source: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for active workers only.

  8. Chart 7 Average Tax Exemption Per Worker (2008) Source: Analysis by Jonathan Gruber for the Kaiser Family Foundation; figures for 2008 for active workers only.

  9. Chart 8 Arguments Made For and Against the Tax Exemption • For: • Encourages employer coverage and pooling • Reflects negotiated tradeoffs for benefits • Against: • Benefits are regressive; no subsidy for those without employer coverage • Encourages “over insurance” • Minimal ability to control federal cost

  10. Chart 9 Illustration: What If the Tax Exemption Grew at Inflation? $3,430 B $580 B $2,850 B Source: Kaiser Family Foundation analysis based on CMS projections for insurance premiums and CPI. Assumes no change in the number of people with employer coverage over time or as a result of lower subsidies.

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