Income and Payroll Tax Debate

Workers who get health coverage from their employers don’t pay income or payroll taxes on it. Should some of it be taxed to help spread coverage to others? 

The Senate Finance Committee’s support for taxing some health benefits as a way to pay for health reform has created yet another fault-line in the debate over how to expand health coverage to millions of uninsured Americans. 

Supporters of capping the current employer-sponsored insurance tax benefit, which is now enjoyed by 162 million Americans, argue that a tax could provide much-needed revenue to pay for reform. It could also reduce disparities, because those with lower incomes and without employer-sponsored insurance are unable to take advantage of those benefits.

Opponents of capping the tax exclusion argue that consumers would purchase cheaper plans to offset the increase in costs from paying taxes on the benefit, which could negatively affect the health of Americans with chronic conditions. Opponents also argue that firms with older workers may bear a disproportionate amount of the burden created by the new tax cap.

This Health Policy Brief explores arguments both for and against such a policy and discusses what Congress may do next, and was published online on July 9, 2009 in Health Affairs.