As Republican senators work to fix their troubled health care bill, there is one giant health insurance subsidy no one is talking about.
It is bigger than any offered under the Affordable Care Act — subsidies some Republicans loathe as handouts — and costs the federal government $250 billion in lost tax revenue every year.
The beneficiaries: everyone who gets health insurance through a job, including members of Congress.
Much of the bitter debate over how to repeal and replace the law known as Obamacare has focused on cutting Medicaid and subsidies that help low-income people buy insurance.
But economists on the left and the right argue that to really rein in health costs, Congress should scale back or eliminate the tax exclusion on what employers pay toward employees’ health insurance premiums. Under current law, those premiums are not subject to the payroll or income taxes that are taken out of employees’ wages, an arrangement that vastly benefits middle- and upper-income people.
That one policy tweak could reduce health care spending, stabilize the health insurance market and, according to Congressional Budget Office estimates, shrink the federal budget deficit by between $174 billion and $429 billion over a six-year period.
Lawmakers briefly pondered the idea this year but quickly abandoned it, recognizing how politically explosive it would be. Still, as Congress seeks to push ahead with major changes to the health system and the tax code, there has been a growing awareness of how long-established tax subsidies — like the mortgage deduction for homeowners — have contributed to economic inequality in the United States.
Republicans who have been fighting for seven years to repeal the Affordable Care Act argue that the Medicaid expansion has cost too much, that the subsidies for lower-income insurance customers are in some cases handouts. Senator Orrin G. Hatch of Utah, the chairman of the Finance Committee, likened the expenditures recently to “the dole.”
“The public wants every dime they can be given,” he told reporters in May as he left a health care meeting to explain the difficulty in cutting those programs. “Let’s face it, once you get them on the dole, they’ll take every dime they can.”
The tax exclusion, though, is also a subsidy, one that disproportionately helps the affluent, who are more likely to receive generous health benefits from an employer and who fall into higher tax brackets, making the tax break worth more.
A 2008 study by the Joint Committee on Taxation found that not paying taxes on these benefits saved people with incomes less than $30,000 about $1,650. For people with incomes above $200,000, the average tax savings was $4,580.
The Affordable Care Act required companies to start reporting the value of employer-sponsored health benefits on W-2 forms (Box 12; Code DD). But most people don’t even realize they get a subsidy typically worth thousands of dollars a year.
For the federal government, the health benefits exclusion is the single largest tax expenditure, accumulating over the next decade to about 1.5 percent of the nation’s gross domestic product. (Economists say it is effectively the federal government’s third-largest health care expenditure, after Medicare, which cost about $581 billion last year, and Medicaid, at $349 billion.)
It costs five times as much as the subsidies the Affordable Care Act set up to help people buy health insurance, which are estimated to total $49 billion this year. And it is far more than the $70 billion the federal government is spending to expand Medicaid under Obamacare this year.
But few lawmakers, Republican or Democrat, have ever argued to change the exclusion. The closest Congress came to making the system more progressive — that is, to make it scale up according to income — was the so-called Cadillac tax included in the Affordable Care Act.