1. The Tax Treatment of Health Insurance: Introduction and History Sherry Glied, Ph.D. Mailman School of Public Health Columbia University sag1@columbia.edu

2. What is the Tax Treatment of Employer-Sponsored Health Insurance? Employee compensation paid in the form of health insurance –Deductible as business expense –not considered taxable income for employees –not considered part of the social security and Medicare payroll base.

3. Jane is paid $40,000 and receives a health insurance policy worth $5,000. –Her employer can deduct $45,000 as a business expense –She pays income tax on $40,000 –She and her employer pay Medicare and Social Security taxes on $40,000 Dave is paid $45,000 and does not receive health insurance through his employer. –His employer can deduct $45,000 as a business expense –He pays income tax on $45,000 –He and his employer pay Medicare and Social Security tax on $45,000

4. Related Tax Provisions – Self-Employed Self-employed people can (since 2003) – deduct 100% of health insurance premiums from net earnings 1996 – 25% Self-employed cannot –deduct health insurance premiums from Social Security and Medicare base

5. Related Tax Provisions -- Flexible Spending Accounts Can be used by employees to shelter from income and payroll taxes –employee payments for health insurance premiums –Employee payments for out-of-pocket expenses 2007 – about 1/3 of private sector workers are offered FSAs

6. Related Tax Provisions – HRA/HSA HRA/HSA provisions –allow for tax-favored savings accounts in conjunction with high deductible health plans –HRAs began in 2002 –HSAs began in 2004 About 8% of private sector workers were offered HSAs in 2007

7. Related Tax Provisions – Deduction for Medical Expense Deduct premiums and medical expenses that exceed 7.5% of AGI

8. Cost of tax exclusion for employer group coverage in 2006 ($billions) Total: $208.6 Selden and Gray, Health Affairs, 2006.

9. Source: CBO, 1994.

10. Favorable tax treatment for ESI (at least some of the time) Austria Belgium Canada Denmark France Germany Greece Italy United Kingdom (until 1997) Tapay and Colombo, OECD

11. Thomasson, 2000

12. Concerns Not well targeted –Most benefits go to people who would have health insurance Not progressive –Benefits rise with tax bracket Inefficient incentives –Noted since 1970s