If we expect to move to an efficient healthcare system that is fair to everyone, Congress will have to take on the greatest subsidy in the tax code. Despite powerful opposition from unions and employers, it is possible to reform the tax break for employment-based health insurance without ruining that market.
Premiums paid for employment-based health insurance are excluded from federal income and payroll taxes. The tax exclusion saves workers over $250 billion a year in federal taxes, and billions more in neglected state taxes. For the average worker, that decreases the cost of their health coverage by at least 30 percent.
The tax exclusion offers a strong incentive for employers to offer health insurance. About 155 million people—about 57 percent of the under-65 population—are covered by employment-based health insurance. But it also fuels the rapid growth of health spending, contributes to stagnating wage growth, and disadvantages low-wage workers.
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