Some of the features of Bobby Jindal’s recently released taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan – fewer tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. , ending the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , and eliminating itemized deductions – should be familiar from other Republican candidates’ tax plans. But a few elements of Jindal’s plan stand out from the rest of the field. Specifically, Jindal would significantly change the tax treatment of employer-sponsored health insurance plans.
Since the 1940s, health insurance benefits provided by employers have not been subject to federal taxation. Businesses are able to deduct the cost of health insurance provided to employees, while employees are not required to report health insurance benefits as taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . Essentially, this amounts to a tax subsidy of employer-sponsored health insurance, which many have blamed for fueling high healthcare costs. In addition, the exclusion leads to over $200 billion in lost income tax revenue every year, one of the most expensive provisions in the tax code.
During the 2008 campaign, candidate John McCain called for replacing the health insurance exclusion with a health insurance credit – thereby requiring Americans to report the value of health insurance benefits as income. He was attacked for this proposal by the Obama campaign, who accused him of taxing healthcare benefits “for the first time in history.” Two years later, President Obama would sign into law a tax on healthcare benefits over a certain threshold – the Cadillac tax – as part of the Affordable Care Act.
While Bobby Jindal has called for repealing the Cadillac taxThe Cadillac Tax is a 40 percent tax on employer-sponsored health care coverage that exceeds a certain value. The aim: to curb health-care cost growth, reduce favorable tax treatment of employer-provided insurance, and help fund the Affordable Care Act (ACA). It was repealed in late 2019 before taking effect. , his tax plan would include a provision similar in concept. According to Jindal’s website, his plan would “replace the exclusion for employer-based health insurance with a standard deduction for health insurance costs whether they are provided by the employer or purchased by an individual.” This means that Americans would be required to report health benefits as income, but would be able to deduct a set amount of healthcare benefits every year. Essentially, employer-provided health insurance would still be tax-free under a given threshold, and would be taxed over the threshold – just like the Cadillac tax.
However, this provision of Jindal’s plan differs from the Cadillac tax in several important respects. While the Cadillac tax imposes a flat rate of 40 percent on the value of employer healthcare plans above a threshold, Jindal’s proposal would impose the rate of whatever tax bracket a household falls into. In the case of Jindal’s plan, insurance plans would likely be subject to a rate of 25 percent, the top tax bracket that Jindal proposes.
Additionally, Jindal would index the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for health insurance to inflation. After its first two years, the Cadillac tax’s thresholds are indexed to overall inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , not healthcare inflation (which grows much faster), meaning that more and more healthcare plans will be subject to the tax with each passing year. It is unclear whether Jindal would index his standard deduction to overall inflation or healthcare inflation.
Perhaps most importantly, while the Cadillac tax is imposed on businesses, Jindal would tax individuals on their healthcare benefits. This would be an important structural shift in the tax treatment of healthcare: for the first time, individuals would be required to report the value of their employer-provided healthcare plans, even if they do not pay taxes on the majority of it. This would be an important administrative step towards understanding who receives tax-preferred employer-sponsored health insurance, and would make it easier to roll back the tax preference later on.
At least one other presidential candidate has called for changing the tax treatment of employer-sponsored health insurance: Marco Rubio’s healthcare plan calls for setting the tax preference for health insurance “on a glide path” and replacing it with a tax credit for healthcare.
Under sound tax policy, the tax code would treat all forms of labor compensation equally, including health insurance benefits. Thus, candidates’ proposals to replace the tax exclusion of employer-sponsored health insurance with a deduction or credit are a step in the right direction.
(Edited to reflect the Cadillac tax's indexation.)
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