Tax Subsidies for Health Insurance

Publication Date: July 2008

Publisher: Henry J. Kaiser Family Foundation

Author(s):

Research Area: Health; Labor

Type: Brief

Coverage: United States

Abstract:

Today almost 160 million people in the United States obtain health insurance through an employer in large part because the tax system subsidizes the purchase of employer-sponsored coverage. The current subsidy costs the U.S. Treasury more than $200 billion in lost revenue since premiums for employer-provided health coverage are excluded from income taxes and from payroll taxes.

This issue brief by Kaiser Family Foundation researchers uses examples of workers with different wages earnings to illustrate how the current tax code affects families depending on whether they have health coverage, and whether that coverage is provided through their employer. By excluding the value of employer-sponsored health benefits from taxable income, the current law generally provides a larger subsidy to higher-income families, since higher-income workers pay federal and state income taxes at a higher marginal tax rate than lower-income workers.

The brief also looks at several other tax provisions that affect the treatment of insurance, including the itemized deduction for medical expenses, which can help offset the cost of individually purchased (non-group) health insurance, and the special tax deduction for health insurance premiums for self-employed taxpayers. The analysis compares the tax treatment of premiums under these scenarios and concludes that they are generally less generous than the treatment of premiums for employer-sponsored coverage.