Tax deductions for health insurance come under scrutiny

November 1, 2005

Tax preferences are projected to reduce workers' taxes by $2 trillion over the next decade.

WASHINGTON, D.C.-A presidential tax advisory panel has proposed capping tax deductions for employer-provided healthcare benefits, an idea that is generating protests from both industry and the public.

Current law allows employers to deduct the value of premiums paid for employee health insurance; employees also do not have to count the value of those premiums as taxable income. Such tax preferences for healthcare are huge-projected to reduce workers' taxes by almost $2 trillion over the next decade.

As part of its charge to propose ways to make the federal tax system more fair and efficient, the committee recommended capping deductions for employer-provided health benefits at the maximum amount the federal government pays in premiums for its workers-about $11,000 a year under current policies. The change aims to limit high-cost benefits for the wealthy while doing little to affect low- and middle-income workers.

BENEFITS TAXED OUT

Last month, America's Health Insurance Plans (AHIP) released survey results indicating broad bi-partisan voter opposition to changing the tax status of employer-provided healthcare benefits. Two-thirds of likely Republican and Democratic voters said they oppose eliminating or reducing the employer deduction for healthcare benefits, even if that change is linked to lowering overall tax rates. The main concern of the public is that eliminating or reducing deductions for healthcare benefits will prompt companies to drop their health benefits altogether.