Joint 

Committee on 

Taxation

Edward D. Kleinbard

Chief of Staff

Joint Committee on Taxation

Tax Expenditures for Healt

Summary of Testimony for Senate Finance Committ

“Health Benefits in the Tax Code: the Right Ince

July 31, 2008

July 30, 2008

JCX-66A-08
Joint 

Committee on 

Taxation

2

Sources of Insurance Covera

Americans Under Age 6

2008

[Numbers in Millions]

Uninsured, 44.2

TRICARE, 11.5

Medicare (disability), 5.8

Medicaid and SCHIP, 

42.1

Self Employed, 6.6

Non-group, 8.4

Em

16.7%

4.3%

2.2%

15.9%

2.5%

3.2%

Source: JCT calculations based on Medical Expenditure Panel Surveys (2001-3), and Internal Revenue Service Statistics of Income 2005 Office March 2008 baseline).
Joint 

Committee on 

Taxation

3

Annual Federal Subsidies for Heal

Delivered Through the Tax Co

Estimated value of Federal subsidies for 2007 (rounded):

Employer-Sponsored Insurance 

(Includes health component of cafeteria plans)3⁄4 Income tax exclusion (w/o deduction) ($ 145 bill3⁄4 FICA exclusion (pre-benefits reduction) ($ 100 bill

Exclusion of Medicare benefits from taxable income Exclusion for self-employed individuals Deduction for expenses > 7.5% AGI HSAs 

Technical term for a Federal subsidy delivered through the tax expenditure
Joint 

Committee on 

Taxation

4

Employer-Sponsored Insur

Dominates the Picture

164 million individuals receive health insurance throTax system used to deliver $245 billion federal subsplans in 2007 aloneEmployee health benefits paid by an employer are juform of compensation

3⁄4 So employer gets tax deduction, like other compensat

But ESI plans are tax-favored compared to other com

3⁄4 Employees exclude this compensation from income (s3⁄4 Employees and employers both exclude this from wag

Substantial evidence that this favorably asymmetricalargely explains dominance of ESI plans in health co
Joint 

Committee on 

Taxation

5

ESI Plans are Group Pla

Powerful advantages to group health plans

3⁄4 If the group is determined by factors other than m

group structure mitigates problems of adverse se

3⁄4 Group has superior negotiating power with insur

individual does

3⁄4 Group can achieve administrative savings

So what’s wrong with ESI Plans?

3⁄4 That is, once decision is made to subsidize healt

deliver the Federal subsidy through tax incentive
Joint 

Committee on 

Taxation

6

ESIs and Other Tax Expend

Distort Government and the E

ESI plans distort apparent size of budget and govern

3⁄4 Make official federal budget and overall size of gover

smaller than they are 

3⁄4 True of every example of targeted tax relief 

ESI plans distort taxpayer behavior 

3⁄4 Employer and employees jointly prefer nontaxable he

low employee deductible over equivalent cash compe

3⁄4 Employee insensitivity to cost of health insurance (be

largely invisible and tax-favored)

3⁄4 Employees therefore indirectly ‘overspend’ on health

is cheap compared to cash compensation)
Joint 

Committee on 

Taxation

7

Government Cannot Contro

Own Subsidy

No cap on value of ESI plans, and few otheon design of those plans Employers/employees, not Federal governmamount of Federal spending Subsidy varies with tax brackets of differen(The “upside-down” subsidy problem) Subsidy varies with changes in individual tarate hikes increase the subsidy’s economic d
Joint 

Committee on 

Taxation

8

Subsidy is Not Universally Av

Everyone pays for the ESI subsidy, in form overall tax rates to fund the $245 billion/yeasubsidy payments But subsidy is not available to everyone — 

employees of employers that offer ESI plan

Contrast this to 7.5% of AGI medical expendeduction—at least that is universally availaEconomic “job lock” of employee with chro(or with sick dependent)