If Congress pursues tax reform in the near future, one tax expenditure likely to be considered and possibly adjusted is the exemption for employer-sponsored insurance -- and it's about time, argue researchers at the Urban Institute.
Valued at $268 billion in would-be federal revenue in 2011, the employer-sponsored insurance tax exclusion eclipses another tax break that libertarians, especially, and also some liberals and conservatives love to hate -- the mortgage interest deduction, valued at close to $70 billion annually. Both disproportionately favor the well-off and, at worst, distort markets, critics say.
But if the 70-year-old exemption for employer-sponsored insurance is too ingrained in the American economy to be fully repealed, it should at least be limited, argue Urban Institute researchers Lisa Clemans-Cope, Stephen Zuckerman and Dean Resnick.
[See also: Employer-sponsored insurance in flux]
Capping the exemption at the 75th percentile of total premiums and medical spending, they write, would "make a significant contribution to debt reduction" -- bringing in an estimated $264 billion in new federal revenue through 2023 -- and also would be "distributionally equitable," affecting mostly public-sector workers and private-sector workers in professional industries like finance moreso than hourly employees in industries like retail.
Across all income levels, Clemans-Cope et. al. estimate that about 15 percent of workers with employer-based coverage would pay higher taxes under a 75th percentile cap in the first year, possibly increasing to 20 percent within a decade, with the average worker paying an extra $633 a year in taxes.
Workers in the lowest quintile would see an estimated 3.3 percent tax increase, while those in the second, third and fourth quintiles would see tax increases of 10.7 percent, 17.5 percent and 25 percent, respectively.
In 2018, the Affordable Care Act does impose a 40 percent excise tax on employer-sponsored insurance costs exceeding an aggregate spending limit tentatively set at $10,200 for a single-member health plan and $27,500 for a policy covering more than one person. It's estimated to bring in about $11 billion a year in tax revenue -- about a third as much as the revenue from the Urban Institute's proposed 75th percentile cap adjustment.
That 75th percentile cap, Clemans-Cope, et al. conclude, would have modest impacts on employer benefit designs -- possibly to the benefit of workers and the nation's healthcare spending trends. Already, they write, many employees are by default trading higher wages "for more costly medical benefits." Over time, "employee compensation has shifted substantially from wages and salaries to medical benefits, and the trend is expected to continue."
A 75th percentile cap could "cause some employers to shift compensation back to wages and salaries rather than medical benefits." And others might offer lower-premium plans with higher cost-sharing, utilization management and limited or tiered networks and, "possibly, lower negotiated provider rates."