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Health insurance and tax breaks

By Jay MacDonald · Bankrate.com
Friday, December 7, 2012
Posted: 10 am ET

There's one little-known aspect of employer-sponsored health insurance that goes completely overlooked and under-appreciated, especially by guys like Papa John's pizza magnate John Schnatter, who would have us believe that health care reform is unduly onerous on corporations.

What's this dark secret? Simply that employer health insurance is the biggest single tax break that Uncle Sam hands out each and every year. Bigger than the home mortgage interest deduction, bigger than capital gains, bigger than charitable giving -- heck, it's even bigger than the deduction for state and local taxes.

Who knew that neither you nor your boss pays taxes on the value of your health insurance? A show of hands?

NPR's Julie Rovner recently spoke with MIT health economist Jonathan Gruber about this Rodney Dangerfield of all tax breaks. When you look at the numbers, it makes all the election-cycle kvetching by Papa John's and other U.S. employers over the evils of "Obamacare" sound like the wails of a spoiled child denied a second helping of ice cream.

By Gruber's estimate, the feds hand out $250 billion per year by not taxing health insurance the same way they tax, say, your wages. How big is that number?

"If we ended the tax exclusion, we could cover every uninsured American with health insurance twice over," Gruber says.

Kinda puts the "radical" Affordable Care Act in perspective, doesn't it?

In fact, that tax break itself currently ranks as the third largest health care program in the country, just behind Medicare and Medicaid.

Some corporate complainers take umbrage at the so-called "Cadillac tax" provision in health care reform, which, beginning in 2018, will attempt to claw back a morsel of that lost revenue by taxing those cushy low-deductible, high-benefit health plans that companies reserve for their top brass. That gives employers five more years to trim back those high-priced policies before they're subject to excise tax on single-coverage plans that cost more than $10,200 and family plans that cost in excess of $27,500. I know, it looks like there are extra zeros in those premiums to me, too.

Meanwhile, Papa John's, Applebee's and Darden Restaurants, which owns Olive Garden and Red Lobster, recently suffered a blow to their bottom lines for vowing to cut back employee hours to minimize the numbers of full-time workers they would have to insure under health care reform. Turns out the public thought that was behavior was extra cheesy, and the chains' customer approval ratings tanked.

No one expects the health insurance tax break to disappear anytime soon, though it may be mentioned in passing during the "fiscal cliff" talks. The tax break is both regressive (it helps those with good coverage more than those with poor or no coverage) and encourages overuse of health services, thereby contributing to health care inflation. But removing it would widely be viewed as a tax increase, and you know how popular those are these days.

There is, however, a strong case to be made that we could significantly reduce our national health care spending by taking employers out of the health insurance business altogether. Obamacare makes a nod in that direction by initiating state health care exchanges beginning in 2014, albeit without creating undue turmoil to employer plans or the private market.

What's your prescription for America's health care ills? Should employers be dealt out of the equation?

Follow me on Twitter: @omnisaurus.
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1 Comment
belinda
January 29, 2013 at 9:03 pm

I'm curious as to how this affects workers who cannot continue to pay the high cost of health care. It's not a matter of a car instead of health care, it's a matter of losing your home trying to pay for it.Will there be some kind of a a tax credit to offset the expense ? Will Income be a consideration ?