Posted on June 6, 2003

Tax subsidies for private health insurance benefit the wealthy


The Robert Wood Johnson Foundation
The Synthesis Project
May 2003
Tax subsidies for private health insurance: who currently benefits and what
are the implications for new policies?

Policy-makers are considering a variety of new tax credit proposals to expand health insurance coverage. Understanding how current tax subsidies work and their role in supporting employer-sponsored insurance (ESI) is important when designing such policies.

Higher-income workers benefit far more from the current ESI tax subsidy than lower-income workers.

First of all, they are in higher tax brackets. A worker in the 28 percent tax bracket saves 28 percent of the premium cost, while a worker in the 15 percent bracket saves only 15 percent.

They also are more likely to have ESI. Almost 90 percent of workers with income three times the poverty level or higher have ESI, compared to less than one-third of workers with income below the poverty level.

In addition, employers of higher income workers pay a larger percentage of the premium on average, translating into a larger tax exemption for those employees.

Finally, higher-income workers tend to have more coverage-multiple policies, richer benefits, and family rather than individual coverage- increasing premiums and the value of the tax exemption.

Lower-income workers benefit only slightly from the income tax exemption and the Medicare payroll tax exemption. They benefit in the short run from the Social Security payroll tax exemption, but it hurts them in the long run by reducing their retirement income.

The overall impact of the upside down subsidy is striking.

Many economists argue that employers pass on the costs of their contributions for health insurance to workers in the form of lower wages. Under that assumption, the tax subsidy is worth one-third of the premium for families with income above $200,000. These families pay only two percent of their income for health coverage.

In contrast, the subsidy is worth about 10 percent of the premium for families with ESI making less than $10,000. These families pay about 40 percent of their income (including what their employers pay in premiums) for health coverage.

Comment: This report demonstrates that current tax policies designed to support our existing system of employer-sponsored insurance result in profound inequities, disproportionately benefiting the wealthy.

Can modifying tax policy alone correct these inequities? Each adjustment can have an impact on employer participation, employee participation, shifting between individual and employer-sponsored coverage, comprehensiveness of benefit packages, variations in the level of public funding, extent of patient cost-sharing, and endless other potential policies. As each adjustment is made to improve equity, the model will move closer to universal, comprehensive coverage with progressive public funding, and elimination of the link to employment.

Try manipulating the single payer model to include private health plans while preserving the same level of equity that a single payer system would provide. Bet you can’t do it. So why do we keep insisting that we begin with private health plans as we reform health care?