Tax Subsidy Estimates for Employment-Related Insurance: Estimates for 2010

Employment-related health coverage is the predominant form of health insurance in the nonelderly, US population covering 67.3% of adults and 56.2% of children in 2006. Current tax law provides strong subsidies to this coverage as employer premium contributions and an increasing share of employee contributions are exempt from income and payroll taxes. Proposals to modify this subsidy are a perennial subject of policy debate due to their overall cost which exceeded $200 billion in 2006 and concerns about both equity−subsidies primarily benefit higher income families− and efficiency−subsidies encourage excessive levels of coverage and medical care consumption. Current reform proposals may introduce a tax on some types of high cost plans. Developing sound policies regarding the tax treatment of employment-related coverage requires accurate estimates of the subsidies’ cost and incidence. Estimating the cost of the subsidy requires data on employer and employee premium contributions as well as data on employees and their families to simulate their marginal tax rates. Understanding the incidence of the subsidy across policy-relevant subgroups requires information on firms and the characteristics of workers and their families. Unfortunately, no national survey collects linked data on both employers and their employees. Our solution to this problem is to construct a synthetic linked data set and simulation model. We use pooled data on workers from the 2005-2007 Medical Expenditure Panel Survey Household Component (MEPS-HC) to form synthetic workforces for establishments in the 2008 MEPS Insurance Component (MEPS-IC). In particular, for each establishment, we select workers who match establishment characteristics (e.g., region, industry, size, whether the firm has multiple locations) as nearly as possible. We then fine-tune each synthetic workforce by adjusting sampling weights to align workers’ demographic characteristics (e.g., percent women, over age 50, in union) to match the percent distributions reported by establishments. The enhanced data are then projected to 2010. The resulting model provides a unique data resource that preserves to the greatest possible extent correlations between establishments’ and workers’ characteristics. We use these data to produce updated estimates of the aggregate tax subsidy to employment-related insurance. We also present per worker tax-subsidy estimates and an analysis of the tax subsidy incidence by firm size, full-time versus part-time employment, wage level, industry and most states. For each group of establishments we estimate the average tax subsidy per worker and per covered worker and present key components of these calculations: the share of all workers eligible for coverage, the take-up rate (conditional on eligibility), and the average subsidy rate per premium dollar. We examine these issues using descriptive statistics and multivariate models. Our model also allows us to identify which establishments will potentially be affected by several recent reform proposals. These include a) an excise tax on Cadillac plans (premiums above a threshold) b) tax subsdies for small firms c) penalties for firms whose employees enter the insurance exchange.