How Capping the Tax Exclusion May Disproportionately Burden Children & Families

[REACTIVATED IN CT]

http://www.firstfocus.net/Download/GOULD.pdf

Introduction

Employer contributions to health insurance premiums are excluded (without limit) from workers’ taxable income.
Proposals to tax all or some of employer-sponsored health premiums have been forwarded as a means of paying for health
reform. Although there have been recent calls to dismiss this idea, namely from House Ways and Means Chairman Charles
Rangel (Pear 2009), limiting the tax exclusion has found support from other members. Experts at the Senate round-table
discussion on May 11 urged senators to limit the tax exclusion (Leonhardt 2009), and Senate Finance Chairman Max
Baucus has maintained that changing the tax exclusion should be part of the discussion (Yoest 2009).

We should proceed with caution before taxing these benefi ts as ill-conceived plans could disadvantage particularly vulnerable groups. Previous research has demonstrated that small fi rms and fi rms with older workers are more likely to be affected by a tax cap (Gould and Minicozzi 2009a). Workers at small fi rms are more likely to have high premiums because of the diffi culties of securing insurance in small groups (e.g. inadequate risk pooling, high administrative costs). Workers at fi rms with older workers pay higher premiums, not because of the generosity of their health insurance plan, but because of their perceived or actual higher health costs.

This paper examines how proposals to cap the tax exclusion may unintentionally disadvantage another group – those
with family plans – a subject yet to be discussed in the public discourse. The decision of where to set the cap needs
to take into account the relative likelihood of single and family plan enrollees being directly impacted. While taxing
health premiums to any extent may erode access to employer-sponsored insurance, policymakers should also be wary
of changes to the tax treatment that disproportionately weaken families’ access to insurance. At the very least, reform
should create a level playing fi eld.

One goal of health reform should be to strengthen the coverage children and families currently enjoy through the
employer market and provide affordable alternatives to those left out. This analysis explains the current tax treatment
of health premiums, documents the recent policy proposals to change the tax treatment, discusses the relative premium
levels and growth of single and family plans, charts out who would be most affected by a tax cap now and in the future,
and makes policy recommendations to better protect families and
particularly children from further losses in employer-sponsored
health insurance.