The Regressivity of Our Current Subsidy System for Employer-Provided Health Insurance
A good summary of the illogic of the current subsidy system for employer-provided health care, from Len Burman's testimony earlier this month before the House Budget Committee:
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Because the tax system heavily subsidizes employer-sponsored insurance (ESI), most nonelderly Americans get their health insurance at work. Employer contributions to employee health insurance are treated as nontaxable fringe benefits and are not considered part of total compensation for income or payroll tax purposes. The tax subsidies for ESI reduced income and payroll tax receipts by as much as $200 billion in fiscal year 2007.
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The tax subsidy for ESI has produced mixed results. Although it has undoubtedly allowed millions of Americans to get insurance, it is a flawed subsidy mechanism. On one hand, excluding employer contributions toward health insurance is administratively quite simple. Employers do not need to measure and allocate premiums to include in employees' income.
On the other hand, the ESI exclusion is an upside-down subsidy. The largest subsidies go to high-income taxpayers who would be most likely to obtain insurance under almost any system. Those with low incomes get little or nothing. The subsidy for ESI depends on the marginal income tax rate, which increases with income. Taxpayers in the highest income tax bracket (35 percent) save 35 cents in income taxes for every dollar of earnings received in the form of health insurance. The roughly 30 percent of low- income households in the zero tax bracket, in contrast, receive no income tax benefit. (They might save payroll taxes, but that is a mixed blessing since their reduced payroll contributions to Social Security produce a commensurate drop in retirement benefits.) The result is a system in which households that face the highest premium burden as a share of income receive the smallest subsidy rate.
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... higher-income workers are much more likely to be covered by ESI than those with lower incomes. About 45 percent of workers with incomes under $20,000 were covered by ESI, compared with 86 percent of workers with incomes over $40,000. Full-time, full-year workers were much more likely to get ESI than part-time or part-year workers. And workers at large firms were much more likely to be covered by ESI than those working for small firms.
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