Changes to the Tax Exclusion of Employer-Sponsored Health Insurance Premiums

A Potential Source of Financing for Health Reform

One of the challenges that Congress will face as it considers major health reform legislation this year will be identifying the necessary financing. Many have suggested that reducing or eliminating the tax exclusion of employer-sponsored health insurance (ESI) could generate significant additional tax revenue to fund expansions in health insurance coverage.

This paper focuses on two specific policy design elements:

  1. a cap, or dollar limit, on the amount of employer-sponsored health insurance premiums excluded from taxable income; and
  2. an index that determines how this cap might grow over time.

Researchers from the Urban Institute demonstrate that limiting the ESI tax exclusion could be an important component of financing health reform. The extent of the impact on overall health care costs depends, in part, on whether this causes employees to demand plans that are less expensive in order to keep their premium under a cap, or whether employees are likely to accept a plan with a higher premium even if some portion of the premium is taxed. Any effects on cost growth would likely be modest, given that the vast majority of the current tax exclusion would remain in place. In any case, limiting the tax exclusion would not only provide funding for health reform but would also mitigate the huge inequities built into the current treatment of employer contributions to premiums.

Most Requested