Option 47:
Eliminate the Payroll Tax Exclusion for Other Employer Fringe Benefits
Topline Estimates
Source: Tax Foundation General Equilibrium Model.
The tax code currently excludes a variety of fringe benefits from income and payroll tax, distorting the incentives employers face when determining the makeup of employee compensation. Exclusions for disability insurance, life insurance, commuter benefits, educational assistance, tuition reduction benefits, on-site gyms, meals and lodging, employer awards, and other miscellaneous benefits favor these types of compensation over taxable salaries and wages. Over time, fringe benefits have comprised an increasingly larger share of total labor compensation, due in part to this distortionary tax treatment.
This option removes the payroll tax exclusion for all the fringes listed above. This would increase the tax burden on labor income, reducing returns to labor, hours worked, and economic output. Some taxpayers, however, would see a reduction in marginal tax rates because including the value of their fringe benefits in the payroll tax base would put their total income above the wage limit, offsetting some of the negative effect on output. It would improve the neutrality of the tax code by treating fringes the same way as wages and salaries for payroll tax purposes.
On a conventional basis, this option would decrease the primary deficit by $269.8 billion over the budget window. Long-run GDP would decline slightly, while long-run GNP would remain unchanged. On a dynamic basis, the primary deficit would decrease by $235.3 billion from 2027 through 2036, $34.5 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 174.1 percent by 2056.
On average, taxpayers would see decreases in their after-tax incomes of 0.1 percent on a conventional basis in 2036 and on a long-run dynamic basis.
Modeled Results
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About the Authors
Erica York is Vice President of Federal Tax Policy with Tax Foundation’s Center for Federal Tax Policy. Her analysis has been featured in The Wall Street Journal, The Washington Post, Politico, and other national and international media outlets.
Garrett Watson is Director of Policy Analysis at the Tax Foundation, where he conducts research on federal and state tax policy. His work has been featured in The Washington Post, The Atlantic, Politico, the Associated Press and other major outlets.
Dr. Huaqun Li is Senior Economist, Director of Modeling Projects at the Tax Foundation. She focuses on developing and maintaining the Foundation’s Taxes and Growth Model, which models the budgetary and economic effects of changes to federal tax policy.
Dr. William McBride is the Chief Economist & Stephen J. Entin Fellow in Economics at the Tax Foundation, where he oversees major research projects primarily related to reforming the federal tax code, advancing sound tax policy, and improving the federal government’s fiscal outlook.
Alex Durante is a Senior Economist at the Tax Foundation, working on federal tax policy and model development. Alex worked as a research assistant at the Federal Reserve Board and served as a staff economist on the Council of Economic Advisers.
Alex Muresianu is a Senior Policy Analyst at the Tax Foundation, focused on federal tax policy. Previously working on the federal team as an intern in the summer of 2018 and as a research assistant in summer 2020. He attended Tufts University, graduating with a degree in economics and minors in finance and political science.
Peter Van Ness
Peter Van Ness is a Research Software Developer at the Tax Foundation working on federal tax policy and model development. Peter previously worked as a research assistant at another think tank and as a data analyst at a consulting firm.
Aleksei Shilov
Aleksei Shilov is a Research Software developer at the Tax Foundation working on economic model development and federal tax policy. Aleksei joined the Tax Foundation as an intern in January 2025. He holds a B.S. in computer science and a minor in economics from Northeastern University and is currently based in Boston, MA.
Daniel Bunn is President and CEO of the Tax Foundation. Daniel has been with the organization since 2018 and, prior to becoming President, successfully built its Center for Global Tax Policy, expanding the Tax Foundation’s reach and impact around the world. Prior to joining the Tax Foundation, Daniel worked in the United States Senate at the Joint Economic Committee.