Taxing Worker’s Healthcare The Tax Exclusion for Employer-Provided Healthcare

BACKGROUND What is the tax exclusion? How much does it cost and why is it so important? How does it impact workers? Why are some supporting the exclusion?   To best understand this issue you need to answer and ask a number of basic questions.

What is the EHC Exclusion? Exclusion vs. Deduction? Exclusion = no upfront cost, tends to benefit workers in middle/low income (healthcare exclusion). Deduction = upfront cost, tends to benefit upper income workers (mortgage interest, capital gains, charitable giving, 401(K)). It’s important to understand the difference between the exclusion and the deduction. A tax exclusion reduces the amount that you report as total income. A tax deduction is an expense that is subtracted from total income before you calculate your taxes. Not just to understand how they are treated within the context of the tax code but how exclusion and deductions tend to benefit different groups of income/people.

WHY IS IT SO IMPORTANT? The tax exclusion is the most expensive tax expenditure for the federal government. $250 Billion in FY 2016 The tax exclusion is therefore a large target for reducing federal deficits or spending increases. Some argue the exclusion drives up health costs. So why is this such an important topic? For starters the tax exclusions is the most expensive tax break the government hands out. It is more than 100 Billion more than the next most expensive (tax breaks for retirement savings) Last year the federal government lost out on $250 Billion. This amount creates powerful proponents for repealing or capping the exclusion.

HOW DOES THIS IMPACT WORKERS? $250 billion in new taxes! Incentivizes employers to drop coverage. Unfairly punishes fire fighters. Similar to the Cadillac Tax. Because the tax excludes payroll and income taxes from dollars used to pay for premiums, capping or eliminating the exclusion would shift up to $250 billion in new taxes to workers and employers. Disincentives employers from providing healthcare. Punishes firefighters and other in dangerous professions due to the high premium they place on the value of their healthcare – often times taking more healthcare benefits over wages. This is similar to the Cadillac tax and so most arguments against hold true for this debate. This idea does not lower health costs – over utilization as a function of high premiums account for 6% of costs as determined by a recent study.

WHY DO SOME SUPPORT THE EXCLUSION? Bi-partisan support opposing the Cadillac Tax. Exclusion is the quickest way to pay for tax ACA replacement. Some believe healthcare should not be subsidized, period. Some believe the exclusion inflates healthcare prices. In part because of our and your efforts there is bipartisan opposition to the Cadillac tax. Republicans need a pay-for to replace the ACA healthcare subsidy exchanges. They cannot practically oppose the Cadillac tax (and its revenue generation) while at the same time deny affordable care to those on the exchanges. Tax credits are their new idea (but cost money) To provide these credits, the exclusion is the easiest/quickest way to help fund them. A portion of Congress do not believe that healthcare should be treated differently than income, however this tax treatment is the very reason employers are able to provide healthcare to workers and why they’ve been able to do so for the past 70 years. Some believe the exclusion will bring down prices. We know this is simply not true. The real drivers of costs are (age/gender/geography/access to primary care/access to preventative care/negotiation capabilities between providers&insurerers, etc…) Any increase in wages a worker may receive would be offset through higher taxes and increased healthcare costs in the form of deductibles/copays/coinsurance.

IAFF POSITION The IAFF strongly opposes taxing employer-provided health benefits during the ACA repeal/replace debate. The IAFF sees no difference between the exclusion and the Cadillac Tax. Taxing healthcare = tax on working families. We’re asking all members to sign onto the Titus/Brown letter(s) opposing the tax exclusion cap/elimination. The IAFF has always and will continue to oppose any taxation of our members’ healthcare. Similar to the Cadillac tax this is an effort to raise money for their version of healthcare form, it is not meant to lower health costs or provide better coverage. We opposed the Cadillac tax for those reasons and we oppose the tax exclusion with the same level of commitment. The IAFF sees the taxation of healthcare as a tax on the middle class. As has always been the case costs will simply shift from the employer to the worker.

Making Your Case Congress tried taxing healthcare through the Cadillac Tax, and it was rejected! Capping the exclusion is equivalent to a tax increase. Capping the exclusion explicitly hurts fire fighters. This policy will not lower costs! The best way to make your case against this idea is to touch base on these 4 talking points. Remember the Cadillac tax has failed in the eyes of the public and policy makers and capping the exclusion could be seen as a stricter version of the Cadillac tax. Make no mistake about it, capping the exclusion will be an immediate tax increase for workers. First in their paycheck and then at the end of the year when they do their taxes (W-2) This policy will not lower costs (touched base on why in previous slide)

ANSWERING OPPOSING ARGUEMENTS This cap will only affect the plans of wealthy Americans! Fire fighters tend to have more expensive plans because of the dangerous nature of their job. The indexing of this plan would ensure that over time more and more plans are captured by the tax.

ANSWERING OPPOSING ARGUEMENTS We need to cap the exclusion to bring down health costs. The true drivers of healthcare costs include: age/gender of pool, access to primary care provider, access to preventative care, geography, ability for insurers and providers to negotiate prices. The average deductible has more than doubled in the past 10 years for the average worker. The real drivers of health costs are not reflected inside your monthly premiums (the portion of healthcare that is excluded from taxation). The idea that lowering health costs will lower payments for workers is not accurate. Costs are being shifted away from premiums (shared usually by employer/employee) and onto the worker in the form of deductibles and coinsurance.

ANSWERING OPPOSING ARGUEMENTS We need to cap the exclusion to help pay for replacing the ACA. The IAFF is primarily concerned for the healthcare of our members. We receive healthcare through our employer in part because of the tax exclusion. Replacing the ACA with a conservative alternative is second in our minds to protecting the healthcare of 170 million workers who receive it through their employer.

Top Targets House Ways and Means Committee members Senate Finance Committee Members Democratic and Republican Leadership

What Do We Want Please remember, give us your feedback on your E-Response Cards found: On the IAFF App Online  www.iaff.org/legresponse

2012 Alfred K. Whitehead Legislative Conference International Association of Fire Fighters