Sunday, May 14, 2023

16th Anniversary of the 21st Century Taxation Blog

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Today marks the 16th year after I started this blog in 2007 while I was a fellow with the New America Foundation. My goal with this blog continues to be to analyze proposals and discuss ideas for helping our tax system to reflect how we live and do business today and to meet principles of good tax policy.

There are many inequities in our tax system such as special tax deductions, exclusions and exemptions that provide a larger benefit to higher income taxpayers relative to others. Examples include the mortgage interest deduction, exclusion of gains that exist at death, and the exclusion of employer-provided health insurance subsidies.

I think many of these exist because the vast majority of people don't understand how they work. Tax literacy is low in the U.S. because we don't teach about taxes in K-12 and even in college, accounting majors are likely the only ones to take a tax course. And tax and budget policy should be taught along with basics of how taxes work.

Today, let's look at how the government, via our tax law, provides tax breaks for health insurance. The largest and more favorable tax benefit for obtaining health insurance is the exclusion for employer-provided health insurance. According to OMB and Treasury, the annual cost of this tax break (cost as in tax revenue not collected) is $237 billion for FY2024 (Table 3). At least 57% of individuals get health insurance from an employer. CBO estimates that 58% of employees under age 65 (156 million people) have health insurance from their employer or a family member's employer.

This health insurance subsidy for employees is very favorable for many reasons:

1. Regardless of the employee's income level and ability to pay for their own insurance, they still get the tax break.

2. Per CBO, the exclusion tends to cause employers to offer more favable coverage - it "encourages firms to offer health coverage with lower cost sharing (such as plans without a deductible), more covered services, and broader provider networks."

3. The higher one's income, the larger the tax savings due to being in a higher tax bracket. So, although a lower income person would need a larger subsidy, the larger subsidy goes to the higher income persons.

Now for contrast, compare the employer-provided health care exclusion to the Premium Tax Credit (PTC). This is available to individuals who don't get affordable coverage from an employer, are not eligible for any government coverage such as Medicare, have household income below 400% of the federal poverty line (this is waived through 2025), and purchase coverage from an exchange.  

What isn't highlighted though is that a PTC eligible person will only get the PTC if based on their annual income they cannot afford the second lowest cover silver plan. For example, using the calculator from Covered California, a 30-year old with $61,400 of income will get a $12 PTC for the year because they are deemed able to afford a silver plan that costs $435 per month (other than $12 of that annual cost). If their income is $61,500, no PTC.

In contrast, if that person with roughly $60,000 of income gets a platinum plan where the employer covers the entire cost, the employee has no out-of-pocket cost and no taxes to pay on the benefit.

Where is the equity in these two tax rules? While removing the 400% of FPL income cap temporarily from the PTC helps a bit, it doesn't change the fact that the exclusion for employer-provided health coverage is far more favorable. A single person with over $61,000 of income gets no PTC but if they work for an employer providing health insurance subsidy, they get a tax break. And that employer-provided subsidy also increases the cost of health coverage for everyone.

The CBO has some solutions regarding the exclusion - here as does the Tax Policy Center such as converting the benefit to a tax credit.

Why was the PTC designed in such an inequitable manner compared to the employer-provided health insurance exclusion?

What do you think? 




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