Mercer, others urge Congress to reject taxing health benefits
Lawmakers should firmly reject proposals to cap the employee tax exclusion for employer-provided healthcare benefits, Mercer and 70 other employer, labor, and patient advocacy groups said in a June 11 letter to congressional leadership.
The letter comes in response to a budget proposal released in March by a large group of House Republicans that would, among other health policy changes, cap the employee tax exclusion for employer-provided healthcare benefits at an unspecified level. In addition, a paper issued in May by the Paragon Health Institute, a conservative research firm led by former Republican White House officials, calls for broad range of healthcare reforms including – depending on what other reforms might be enacted – capping the exclusion at 125 percent of the national average value of employer-sponsored plans.
“In addition to broad societal benefits and underpinning the stability of our health care system, the current tax-favored treatment of employer-provided health coverage delivers critical value and investment return for employers, workers and their families, and the federal government itself,” the Alliance to Fight for Health Care – of which Mercer is a member – said in its letter.
While policymakers and experts in both parties have argued that the tax exclusion for employer coverage incentivizes higher healthcare spending and should be capped or eliminated, attempts to do so have consistently been stopped by employers and other stakeholders. The Affordable Care Act’s “Cadillac tax” on “excess” healthcare benefits, for example, was delayed twice before Congress repealed it in 2019 over concerns raised by data and economic modeling done by Mercer showing how the tax would hurt workers and raise effective tax rates for lower-income families.
But as Congress prepares for a major tax policy debate next year over extending tax cuts enacted in 2017 (and temporarily expanded tax credits for individuals who buy ACA exchange coverage), there is concern that the tax exclusion for employer-provided healthcare benefits could be a target.
Lawmakers are already hunting for new revenue to at least partially offset the cost of extending these provisions, which the Congressional Budget Office recently projected to be about $4.6 trillion over the next ten years. At the same time, the White House Office of Management and Budget estimates that forgone revenue from the tax “expenditure” for employer-provided healthcare – the largest in the tax code – will amount to nearly $3.5 trillion through 2033. The CBO modeled several proposals for capping the tax exclusion in a 2022 report that found savings ranging from about $6.5 billion to more than $900 billion depending on where the cap is placed.
This would appear to make capping the exclusion a tempting source of revenue for Congress. Calculations done by the American Benefits Council, however, have shown that for each dollar in tax expenditures for employer-provided healthcare, employers spend about four to five dollars on health benefits, underscoring the joint letter’s argument that the exclusion delivers value for the federal government as well as employers and millions of Americans.
