Tax Subsidies to Employer-Provided Health Insurance

This paper investigates the current tax subsidy to employer- provided health insurance, and presents new evidence on the economic effects of various tax reforms. It argues that previous analyses have overstated the tax subsidy to employer-provided insurance by neglecting the substantial and growing importance of after-tax employee payments for employer-provided insurance, as well as the tax subsidy for extreme medical expenses, which discourages insurance purchase. Even after considering these factors, however, the net tax subsidy to employer-provided insurance is substantial, with tax factors generating an average reduction of approximately thirty percent in the price of this insurance. Reducing the tax subsidy, either by capping the value of employer-provided health insurance that could be excluded from taxation, or eliminating the exclusion entirely, would have substantial effects on the level of employer- provided insurance and on tax revenues.