Tax Break for Employer Health Care Could Finance More Jobs and Lower Taxes

August 05, 2013

Dynamic Economic Estimates Illustrate an Attractive Trade

Washington, D.C., August 5, 2013—Ending the federal tax preference for employer provided health insurance could, if paired with a pro-growth tax cut, be a significant boost to the U.S. economy and create as many as new 826,000 jobs, according to a new analysis by the nonpartisan Tax Foundation. Members of Congress are currently reviewing an array of federal tax expenditures for possible elimination as part of comprehensive tax reform legislation, and the exclusion for employer provided health insurance is the single largest.

“If we were to end the special treatment for health care benefits, income tax rates could be lowered by 14.6% across the board,” says Tax Foundation Fellow Michael Schuyler, Ph.D. “The effect of Americans working and investing more would lead to the economy expanding by $125 billion and actually producing an additional $29 billion in federal tax revenue. In terms of growth effects, it would make excellent sense to trade away the current tax exemption for lower tax rates.”

In a conventional revenue estimate that holds the economy’s total size fixed, removing the tax exemption for employer-provided health coverage would have boosted federal individual income tax collections by $160 billion in 2012.

Without an offsetting income tax cut to stimulate growth, however, the real world effects would be rather different. Simply eliminating the exemption would bump many people into higher tax brackets. With a heavier tax bite and smaller after-tax returns, people would find it less rewarding to work and invest. The Tax Foundation’s economic model estimates that GDP would fall by $108 billion, and because of negative economic feedback, our dynamic revenue estimate is $133 billion, which is $27 billion lower than the “static” estimate.

“We also found dramatic changes in the impact on jobs,” said Schuyler. “The elimination of the health insurance exclusion on its own would reduce employment by the equivalent of about 519,000 full-time workers. Including the income tax rate cut, however, would increase employment by the equivalent of about 826,000 full-time workers.”

Tax Foundation Fiscal Fact No. 384, “The Exclusion for Employer Provided Health Insurance” by Michael Schuyler, Ph.D. and Stephen Entin, is available online. This study is the sixth in a series of 11 case studies in the Tax Foundation’s Economics of the Blank Slate series.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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