Tax Facts
Cap on Employer Exclusion for Health Coverage
Under current law, the value of health insurance coverage provided by employers has been excluded from employees’ income without limit. Similarly, these expenditures are not subject to FICA or Medicare taxes. The Republican fiscal year 2025 budget proposal would contain a provision that would cap the tax exclusion for employer-sponsored health coverage.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about putting a cap on the employer tax exclusion for health insurance coverage.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Allowing an uncapped deduction for employer-sponsored health insurance coverage only serves to increase the cost of health care services in this country. Health insurance costs are skyrocketing. With every year, the cost of coverage becomes less affordable—and allowing an unlimited tax exclusion only adds fuel to the fire. A reasonable cap on the exclusion would go a long way toward reducing health insurance costs across-the-board without hindering Americans’ access to quality health insurance coverage.
Bloink: The real problem in terms of the cost of health insurance coverage is with the supply side of the equation. Focusing on the income tax exclusion isn’t going to solve the problem. Health care providers must be subject to rules regarding transparency, so that both employers and employees have greater information with respect to the cost of specific elements of their health coverage.
_________________________________________
Byrnes: Capping the tax exclusion for employer sponsored coverage would give employers an incentive to take action and negotiate lower health coverage rates. Currently, the incentive works in the opposite way—every dollar of health coverage receives tax preferences, so employers have no incentive to seek out reasonable pricing.
Bloink: Transparency itself would serve to increase competition and thus reduce the cost of health services in America. The income tax exclusion for health coverage is in place for a reason. If we’re trying to encourage employers to offer health insurance, we have to provide a tax incentive. Increased access to information will give both employers and employees the opportunity to make more informed decisions with respect to their health care expenditures. In the long run, that’s what’s going to reduce the cost of health coverage.
_________________________________________
Byrnes: Once healthcare providers realize that they cannot charge absurd prices—because employers and employees are no longer willing to pay--prices across the board will become more reasonable. The tax incentive will be much more effective when compared with a system where we simply impose more regulations. Yes, transparency in the health insurance market is important—but it still won’t give businesses the financial incentive they need to seek out lower healthcare prices.
Bloink: Capping the exclusion for employer-sponsored health coverage would only result in a situation where Americans are not receiving the valuable and comprehensive health insurance coverage that they both need and deserve. Employers who are already offering generous health insurance benefits shouldn’t be penalized for providing that important employment benefit. Instead, we should be searching for ways to give employers the opportunity to spend smarter when it comes to the employment benefit health insurance choices.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about putting a cap on the employer tax exclusion for health insurance coverage.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: Allowing an uncapped deduction for employer-sponsored health insurance coverage only serves to increase the cost of health care services in this country. Health insurance costs are skyrocketing. With every year, the cost of coverage becomes less affordable—and allowing an unlimited tax exclusion only adds fuel to the fire. A reasonable cap on the exclusion would go a long way toward reducing health insurance costs across-the-board without hindering Americans’ access to quality health insurance coverage.
Bloink: The real problem in terms of the cost of health insurance coverage is with the supply side of the equation. Focusing on the income tax exclusion isn’t going to solve the problem. Health care providers must be subject to rules regarding transparency, so that both employers and employees have greater information with respect to the cost of specific elements of their health coverage.
_________________________________________
Byrnes: Capping the tax exclusion for employer sponsored coverage would give employers an incentive to take action and negotiate lower health coverage rates. Currently, the incentive works in the opposite way—every dollar of health coverage receives tax preferences, so employers have no incentive to seek out reasonable pricing.
Bloink: Transparency itself would serve to increase competition and thus reduce the cost of health services in America. The income tax exclusion for health coverage is in place for a reason. If we’re trying to encourage employers to offer health insurance, we have to provide a tax incentive. Increased access to information will give both employers and employees the opportunity to make more informed decisions with respect to their health care expenditures. In the long run, that’s what’s going to reduce the cost of health coverage.
_________________________________________
Byrnes: Once healthcare providers realize that they cannot charge absurd prices—because employers and employees are no longer willing to pay--prices across the board will become more reasonable. The tax incentive will be much more effective when compared with a system where we simply impose more regulations. Yes, transparency in the health insurance market is important—but it still won’t give businesses the financial incentive they need to seek out lower healthcare prices.
Bloink: Capping the exclusion for employer-sponsored health coverage would only result in a situation where Americans are not receiving the valuable and comprehensive health insurance coverage that they both need and deserve. Employers who are already offering generous health insurance benefits shouldn’t be penalized for providing that important employment benefit. Instead, we should be searching for ways to give employers the opportunity to spend smarter when it comes to the employment benefit health insurance choices.
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