Tax Day in the United States is the standard deadline for filing personal income taxes. Millions of us find ourselves staring at W-2 Forms and taking note of how much money we鈥檝e paid to local, state, and federal governments in the past year.
Now imagine you owed taxes on not just your income, but your health insurance coverage. For nearly 70 years, as a matter of federal law, health insurance coverage has been tax-free to employers and employees alike, enabling nearly 180 million Americans to have access to affordable, comprehensive health coverage through work. Taxing employer-provided health coverage would mean a very different Tax Day, to the tune of over paid by employers, unions, working families, and small businesses.
This tax exclusion effectively reduces the cost of purchasing health coverage by at least 32%, on average, compared to if it were purchased with post-tax dollars. Taxing health benefits would mean raising the cost of enrolling in coverage, leaving fewer people covered.
The tax treatment of health coverage is not only ingrained in American life but is also central to our entire health care system. Changes to the tax treatment of employer-provided health coverage would cause a significant disruption. It would not only risk the availability of health coverage for the nearly 180 million people with coverage at work, but also call into question the financing of public programs. Were it to be removed, the foundation of how we cover hundreds of millions of Americans would be at risk.
The tax treatment of health benefits does not drive the cost of health benefits. Ask any employer in the country that offers health benefits and among their top business priorities is to reduce the cost of health care spending. It is a fact that as the underlying prices of delivering medical care go up 鈥� such as rising prescription drug prices, hospital charges, and physician fees 鈥� so, too, does the cost of coverage. Taxing health benefits will only make the problem much worse, by making all of those services more expensive.
Taxing health coverage will not increase wages, but it will increase out-of-pocket costs. There is a common argument that if you tax health benefits, employers will increase wages to make up for it. The reality is there is to support that. Any increase in take-home pay would be consumed by higher out-of-pocket health care costs, particularly for those living with chronic health conditions.
On the flip side, the costs and benefits of financing health coverage through employment and the tax code results in an annual net benefit of $1.5 trillion, according to from economist Casey B. Mulligan. That鈥檚 nearly $10,000 per year for every person covered by employer-provided coverage. Even limits on the exclusion would amount to a middle-class tax increase.
The Cadillac Tax presented a cautionary tale 鈥� messing with the tax treatment of health coverage will eventually reach every employee. While pitched as a tax on 鈥渓uxurious鈥� health plans, the Cadillac tax would have hit working-class and middle-class families. That鈥檚 exactly why it was repealed with strong bipartisan support. Prior to its repeal, think tanks and non-partisan observers examined how capping the employee tax exclusion or the Cadillac Tax would raise taxes for earners at different income levels.
Taxing health benefits isn鈥檛 just bad public policy, it鈥檚 bad politics. Voters are overwhelmingly opposed to taxing their health benefits. A 2021 poll found that 62% of Americans support keeping their employer-provided health coverage tax-free. Let鈥檚 make sure no future Tax Day involves paying taxes on health coverage.