Wednesday, January 1, 2014

Tax expenditures on employer sponsored health insurance.



Question:   

What is a tax expenditure?  How large is the estimated tax expenditure for employer sponsored health insurance (ESI)?   Why might the Affordable Care Act (ACA) lead to a decrease in the tax expenditure associated with expenditures on ESI? 

Answer:  

I found this nice definition of tax expenditure on the Tax Policy Center web site

Tax expenditures are revenue losses attributable to tax provisions that often result from the use of the tax system to promote social goals without incurring direct expenditures.

Actual Estimates:

The exclusion of expenses by employers on medical insurance premiums and medical care is the single largest tax expenditure in the federal tax code.    The U.S government 2010 budget listed this tax expenditure at $131 billion for 2008.  The second largest tax expenditure for exclusion of pension contributions and tax exclusion and earnings was $117.7 billion in 2008. 

It would be useful to get expenditure for health insurance per covered employee. The Medical Expenditures Panel Survey (MEPS) had information on number of employees, % of employees in firms that offered ESI, % of employees that were eligible for ESI in firms that offer ESI, and the percent of eligible workers who enrolled.  The product of these numbers is my estimate of the number of employees.

I get 62.5 covered employees in 2008.  See chart below for details.

Divide the $131 billion tax expenditure by the 62.5 million covered employees and get $2,095 per covered employee in 2008 dollars.

Calculations are presented in the table below: 

Tax Expenditures on ESI
$131,000,000,000
Number of employees
116,000,000
% employed in firms offering health insurance
0.877
% of employees in firms that offer ESI that are eligible for health insurance
0.781
% who accept the offer
0.787
Number of Employees with ESI coverage
62,529,269
Per-Covered Employee Expenditure on ESI
$2,095

Staff at the Joint Committee of Taxation (JCT) for Congress recently reported that the tax expenditure for the exclusion of health insurance premiums from taxable income would cost $760.4 billion over the 2013 to 2017 time period.   This was up from $706.6 billion over the 2012 to 2016 time period.

The impact of the Affordable Care Act:

I suspect that actual tax expenditures for the purchase of employer sponsored insurance will plummet once the ACA is fully implemented and state exchanges begin operating properly.   

The mere existence of state exchanges will cause many small firms to jettison their health insurance because employees at firms that offer ESI are not eligible for tax credits sold on state exchanges.  The average tax credit for health insurance policies sold on state exchanges is likely to be  smaller than the current tax expenditure for ESI; hence, this aspect of the ACA may lead to an increase in tax revenue for the federal government.

The change will also lead to a large increase in costs to workers because firms are likely to reduce their contributions.

Decisions by the Obama Administration governing the implementation of the ACA are increasing the use of state exchanges for the sale of individual policies and increasing the erosion of ESI.  Examples include:   

The delay in the creation of state exchanges for insurance sold to small firms.  (If employees at small firms find insurance on individual markets many small firms will choose to not create ESI.  Again, firms currently with ESI will choose to jettison policies.)

The delay in the implementation of the employer mandate.  

The definition of the “affordable” insurance used in the employer mandate.  The Obama Administration has interpreted “affordable” to mean the cost of an individual policy.   As a result many firms have adopted polices to reduce their offerings and increase their costs of family polices and spousal coverage.


I suspect that the growth of state exchanges for the sale of individual policies and the erosion of ESI will lead to a substantial increase in tax revenue for the federal government.  Official JCT estimates of current tax expenditures do not reflect changes due to the ACA.

Hopefully Congress and the President will increase and fix problems with the ACA tax credit.  See my post on problems with the ACA tax credit.


I am not holding my breath for this to happen because I don’t want to die of asphyxiation.  

Interesting Sources of Information on ESI tax expenditure

Analysis from TaxAnalysts:



Analysis from the Tax Policy Center:


The JCT:

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