Taxing health benefits: Some downsides

In the past I've advocated capping the deductibility of employer-sponsored health insurance in order to encourage restraint in health care spending and to increase the level of fairness. I have to admit, however, that I haven't considered some of the nuances involved.A new study (How Capping the Tax Exclusion May Disproportionately Burden Children & Families) commissioned by children's advocacy group First Focus and the Economic Policy Institute contends that taxing health insurance benefits would disproportionately harm dependent children. That's because the proposals under consideration underweight the costs of family coverage relative to individual coverage. That means a higher share of family premiums would end up being taxed than individual premiums, and could easily cause employers to make family coverage relatively less generous.

[Report author Elise] Gould explains that the average cost of premiums for a family plan is 2.7 times higher than premiums for single adults. However the caps, deductions, and credits proposed recently do not completely account for this ratio, disproportionately affecting family plans over single plans. In an analysis of a 2005 proposal capping the income and payroll tax exclusion for employer and employee contributions to health insurance premiums at 2.3 times that of individual coverage, Gould finds that family plan enrollees are over 70 percent more likely to be directly affected than single plans. According to Kaiser/Health Research and Educational Trust Employer Health Benefits Survey, out-of-pocket costs in employer coverage is already 4.7 times greater for families than for individuals.

Gould has made similar observations in other recent studies, pointing out that other vulnerable groups may also be adversely affected by taxing health benefits in whole or in part:

• Firms with older workers --because they tend to have higher medical expenses and thus higher premiums
• Smaller firms --which pay higher premiums due to inadequate risk pooling, higher administrative costs, and less negotiating power

The paper's conclusions are reasonable:

Recent proposals do not examine the reality close enough and assurances should be made to not harm children’s chances of securing or maintaining quality, affordable coverage.  If Congress goes ahead with setting a limit on the tax exclusion, thresholds for the cap should take actual [employer sponsored insurance (ESI)] premiums into account, reflecting the current marketplace for health insurance.  Similarly, subsidies to purchase insurance, for instance in a national exchange, ought to take into account the true relative price of insurance to keep families from being overly burdened or inadequately afforded high quality coverage.  Children’s coverage has already experienced large declines and policies which disproportionately disadvantage health insurance for kids (ESI dependent coverage) would exacerbate a weakness in the current system