Ever since President Obama raised the idea of taxing health care benefits, I’ve been asked what I think about the plan. Specifically, I’ve received a number of emails which more or less ask three questions:
- How would it work?
- Do I think it’s fair?
- Do I like it?
I’m happy to oblige. But first, some history.
This idea of taxing health care benefits is nothing new. In fact, Senator John McCain put forth a similar proposal when he was running for President. At the time, the idea was widely criticized as damaging to working Americans. But, of course, even last summer, most Americans were blissfully (or perhaps not so much) unaware of the economic crisis that was brewing.
Jump ahead to today’s economic climate. Unemployment is up. Tax revenue is down. Government expenditures are up. The percentage of employers offering full benefits, including health insurance, is down.
And suddenly, that idea from more than a year ago doesn’t look so bad to many Congressional officials. Go figure.
So now, the proposal is not only back on the table, it’s back in a big way: it’s actually making its way through Congress.
So what’s the basic idea? Put simply, it would characterize employer-provided health insurance benefits as taxable. So, for example, to the extent that your employer pays a portion – or all – of your health insurance benefits, that portion would be reportable as taxable income on your form W-2 at the end of the year. To the extent that you pay a portion – or all – of your health insurance costs yourself, that portion is not taxable.
Sounds pretty simple, right?
That’s the answer to the first question.
Now, to the second: do I think it’s fair?
Actually, I do. Health insurance is a massive benefit not provided to all employees. It’s a perk. And a substantial one. If taxed, health care benefits are estimated to be worth nearly $246 billion in revenue – that’s nearly ten times the entire revenues of the state of Pennsylvania alone.
Let’s compare two employees, each nearly identical. One employee makes $50,000 per year and receives health insurance benefits of $4,700/year paid by her employer. The other employee makes $50,000 per year and pays her own health insurance costs of $4,700/year.
(Those figures are based upon the following statistics: In 2008, the annual premium for an employer health plan covering a family of four averaged nearly $12,700. The annual premium for single coverage averaged over $4,700. The median income in the US was approximately $50,000.)
What’s the difference?
Assuming a 20% tax rate (for easy math), here’s the breakdown:
The first employee has $4,700 health insurance benefit tax-free and walks away with $40,000 in cash ($50,000 – 20% tax on $50,000).
The second employee walks away with $35,300 in cash ($50,000 – 20% tax on $50,000 = $40,000 – $4,700 in health insurance). Even worse, the employee may not be able to fully deduct the cost of the health insurance because she must first satisfy the medical expenses floor and then only if she itemizes. And, complicating matters, the cost of that insurance is likely much higher for the employee – individual rates are statistically much more expensive than corporate rates (I can personally attest to this – my husband and I save several hundreds of dollars per month by buying coverage through our firm).
Is that fair?
If employees were taxed on the health care benefit, here’s the breakdown:
The first employee now walks away with $39,060 ($50,000 – 20% tax on $54,700, the cost of salary plus benefits).
The second employee still walks away with $35,300 ($50,000 – 20% tax on $50,000 = $40,000 – $4,700 in health insurance).
Remarkably, in both examples, the first employee is better off than the second employee. In the second example, however, there’s a wee bit more parity. So, do I think taxing health benefits is fair? Yeah, I do. Because getting health insurance benefits tax free is, quite simply, the same as being paid more to begin with.
But almost everyone gets health insurance as a perk, right?
Actually, no. Nearly 80% of all businesses in the US are self-employed. (Source: US Census) That means that at least 80% of the US workforce provides its own health care benefits; it is not a company-sponsored benefit. Additionally, most small businesses are overwhelmingly sole proprietors, partnerships, LLCs, LLPs, or S corporations, each of which has restrictions on tax deductibility for health insurance.
Of the remaining businesses in the US who report having paid employees, 78% have fewer than 10 employees. (Source: US Census) The US is still very much driven by small business. And small business is paying a lot for health care. Many small businesses have been priced out of quality employees because of the cost of health care. Interestingly, making health care insurance taxable would make compensation packages between smaller and larger businesses much more balanced.
So do I think taxing benefits is a fair proposal? Actually, I do.
Do I like it? That’s a totally different question. I’m not sure. I like the idea of it in theory but I think that the imposition of the tax would be akin to a slap in the face for many taxpayers. As a society, we’ve come to rely on those benefits as something that we’re entitled to, a perk that we deserve, something that no one should be able to touch. I think of it like the mortgage interest deduction, something that inherently and unfairly benefits a disproportionately small percentage of the population but something that US taxpayers have come to rely on when making lifestyle choices. The imposition of a tax on health care benefits might be an unexpected and unwelcome addition for taxpayers who have made choices about employment based on a benefits package that, up until recently, would have been tax advantageous.
It’s a politically dangerous – and potentially complicated – proposal. I happen to think it’s a step in the right direction, though. What do you think?
Kelly, if we had single payer this wouldn’t be an issue for anyone. We’re already paying congress’ excellent health insurance as well as their salaries. Meanwhile how many millions have no insurance or are being denied care by insurance companies in the name of profits. Let’s get the profits out of health care…
yeah, I’m a lefty.
Thank you for posting on this 🙂
I’m leaning toward thinking taxing the benefits is fair, but then again, not so much.
For one, employers (I believe) factor in the cost of the benefits when determining salary. What you are paid as an independent contractor is typically higher than what you would get as an employee because the employer doesn’t have to cover your benefits.
For example, a freelance writer’s hourly wage is probably higher than an employee at whatever publication they are writing for. Maybe it’s not high enough to fully account for the entire benefit, but it does defray the cost of seeking your own health care so as to make the disparity between employed and self-employed smaller.
I agree with Dee. If this is “fair,” what’s next — the end of the self-employed health care deduction? Using this logic, shouldn’t the employer’s half of FICA be taxable? It’s a slippery slope!
I’ll take it taxable IF the employer has to give me the option of taking the compensation in cash (which I’d do instead). A lot of employers only give you two coverage options: Single and Family. Which means, either I’m covered and my spouse isn’t, or I’m paying for Family coverage (i.e., subsidizing health insurance for other people’s kids; I already subsidize their education, through property taxes, but that’s not enough; I have to subsidize their health insurance, too?). If they’d give me Single + 1 (which some, but not many, employers do), that would be great — but if my only options are Single or Family, I’ll take the cash and buy my own coverage. If I’m going to get taxed on this compensation, I want more say in what I get.
Anybody who thinks ‘single payer’ health care would provide the solid gold benefits that are currently enjoyed by Congress is dreaming. Destroying the private health care system in America, and forcing everybody into public health care, is illogical. We currently have some homeless people in America, should we destroy every single private home in America, and force everybody into public housing high-rises in the interest of “fairness” in housing?
For that matter, how many things that are run by the government for the “public” are top notch? The Post Office? Public Schools? Drivers’ License Testing Facilities? Pothole Repair? Think about how pleasant it is to deal with America’s “public servants” when necessity forces you to interrupt the working hour of the average government employee. You really want your life and health care to be determined by the federal government?
One spector of this argument is the pensioner. As a pensioner of what was the world’s largest chemcial manufacturer, health insurance is a major part of my pension benefits. Affordable? Only if you use it. But that is another story.
DuPont has not adjusted their pension for their pensioners long before 1983, and it may never have seen adjustments. But I know for a fact pensioners who retired in 1983 and since have not had an increase (COLA) since. BUT, for many their part of medical premiums has increased significantly.
So take the method Kelly explains the methodology of taxing health care benefits. Pensioner receives $20,000 / yr, and health insurance tax free. The pensioner is still paying federal and state taxes. My plan covers myself and my spouse who is on medicare, and my premiums are approx. $5300 a year. That drops the pension income to less than $12,000/yr. Now add the portion of health care the company pays as income, to be taxed, depending on your other retirement income, your tax obligation will increase, in many cases beyond what many can afford. For widows / widowers, usually the survivor benefits are only 40% of the pension. What a blow to those folks!
The last thing a pensioner needs is additional taxes. Each year the premium for health benefits can, and usually does, increase. Therefore a pensioners tax obligation increases annually, but their income is static.
I firmly disagree in regard to taxing health care benefits particularly for those on fixed incomes.
Excluding politicians who have little regard for the average person’s plight, the next generation should take a good look at what they will inherit in the not so distant future. Remember, social security as a future income? The projected point at which tax revenues will fall below program costs comes in 2017 . The projected point at which the Trust Funds will be exhausted comes in 2041. A little more than 30 yrs., a working career away.
I am fortunate DuPont offered a pension as a retirement benefit, that was always mentioned at every opportunity when discussing employee compensation. Now, the company which first offered employees a pension 100 years ago, offers its new employees no pension, but a 401k plan. Now ask yourself, will the market (stock, bond, or money) hold your retirement wealth intact for your retirement? Then there is the corrupt corporations such as Enron, some of the recent failed banks, that have left their employees with nothing to show for their work. It is a different story for those over 60, even 50, than those who are 25-40 and have a working career ahead of them. But even those folks will have to struggle soon, as many young potentially brillant folks look for work in a jobless market.
My point is, if a change is needed? OK. But make the change gradual so the effect to the many who just make ends meet, aren’t dealt a blow from which they can never recover.
For those talented young folks who read this blog, I think it great to be able to take your education and talent, and go after the American dream. Be successful. But remember for everyone who is able to benefit from their efforts, many are not and society will be what the poorest have to be content with.
American history is not taught as it should be. Fifty-six men signed the documen we celebrate today firmly stating “And for the support of this Declaration with a firm reliance on the protection of divine providence, we mutually pledge to each other our lives, our fortunes, and our sacred honor.”
How many readers know the following statement?
Stephan Hopkins, Ellery’s colleague from Rhode Island, was a man past 60. As he signed with a shaking pen, he declared: “My hand trembles, but my heart does not.”
I wonder what the Founding Fathers would think of their country today? For sure pride in its accomplishments as a people. And what the future holds for the people, The United States of America? Only that can be answered as “We the People” participate in their government. That is why they signed their names to a piece of parchment that today thrills one’s heart when viewed at the National Archives, 233 years ago. We should never loose sight of what it says and why it was written.
I agree with taxing employer-paid health care benefits. My husband and I have have always paid our own medical ins premiums, we were never lucky enough to have an employer who paid them. And we never were able to itemize our deductions so we never got any tax deduction on these premiums. And, no, we weren’t paid more than people working for companies who paid health care benefits.
Either tax the company paid benefits, or allow for an adjustment for medical insurance premiums paid by people who don’t have employer-paid med ins.
Seems simple to me, it is all NUTS! You have to be a democrat or a small child to always be crying: “IT ISN’T FAIR!”
The “CHANGE” that was created by the election of the Obamunism has just started and probably won’t end until we have a total “FAIR” system and everyone is paid according to their needs and not their values.
If someone should pay taxes on the health insurance benefits of the employer, then no one should be able to pay their insurance premiums pre-tax. That isn’t fair! And it certainly isn’t fair that not only do some folks get to have their insurance premiums pre-tax, they get to make purchases of prescription drugs through a health-savings plan pre-tax while others don’t.
What is the “fairness” that some people don’t make enough monies to save anything for their retirement, while others save considerable amounts through pre-tax dollars called 401k’s or IRA’s. But don’t worry the democrats and the Obamists have plans on correcting those unfair practises as well. They have taken over the auto industry and the banks and now the insurance industry and it won’t take long before the retirement industry and take everyone’s accounts transferring to the largest PONZI scheme in the world called the Social Security Administration.
Jeff Day EA
Your logic is questionable, TaxGirl. You say “Nearly 80% of all businesses in the US are self-employed. (Source: US Census) That means that at least 80% of the US workforce provides their own health care benefits”.
Just because the business owner is self-employed does not mean that all of the staff are self-employed. Most businesses have more than one employee. These additional employees are not self-employed. And what of corporate businesses? Thousands and thousands of employees, none of them self-employed.
Kelly your breakdown of WHY this is fair seems logical, but this is just yet another increase in taxes proposed by a government out of control with spending.
Beyond the post itself, I can’t figure out why the mainstream media is yet to FULLY discuss how this will adversly affect those families who earn less than $200,000/$250K? Why isn’t this even talked about except on Fox which “kind of” gives it an anti-Obama feel.
I said it during the election and I will say it again. The BULL Obama spewed about cutting taxes for everyone making less than $250,000/yr was a lie when he said it, and he said it a hundred times. Everyone will see tax increases with this administration. If you smoke, you have already got your taxes raised far more than the income tax cut you received. The fact is, this administration beat it into our heads that we would get a tax cut. They didn’t whisper it, they yelled it from the roof tops. This administration lied over an over about this and many other promises it made.
If it is fair to tax these benefits then so be it. Cut my income taxes further so that I will not see a net loss in pay. Otherwise this is just a tax increase that I was promised not to have to endure.
If we want to talk about fair, what the hell is more unfair than the progressive income tax? We should all have to pay the same percentage of our income in tax, no matter what we make.
Fairness is not a selective argument. When we make an argument for fairness we need to look at the entire picture. Until we do that, we have no moral authority to determine what is fair and what is not; the whole system is unfair top to bottom and selecting only this one thing ignores the fundamental unfairness of the whole system. It’s like putting lip stick on a pig.
I’m going to have to disagree that fairness can’t be a selective argument. You can certainly look at a moment in time or a piece of a bigger picture, judge that something is not fair and not, by that one instance, negate other fair moments. It happens all of the time in life – in sports, in entertainment, in court.
Just because one facet of something may not be fair doesn’t mean that everything that follows isn’t. And vice versa.
That isn’t to say that this tax would be “more” fair than any other, just to say that I think the arguments are separable.
I agree with Urbie, there is a major problem that you fail to take into consideration. We have 2, my spouse and I, and because we only have the single or family option our company share is 13000.00. Its clear that even thier portion is overpriced and that doesn’t include our portion which is another 3588.00 per year! To be taxed on this income is obsured. The other issue is that if your family is making 50000-70000 a year, even just two of you– you are middle class. Your not the rich, you the class paying for everything! We will had out tons of money and in the end the middle class worker is the one who will go broke.
Rainer,
Point well taken. I should have used another term.
Under the proposed taxation of health insurance premium, will it also effect pensioners?
The government shouldn’t be taxing health care benefits that are paid for by the employer OR the individual. That’s the bottom line.
If in fact my employer paid premiums become taxable, I will ask to not be covered. I will then go the emergency room every time I have a headache and pay the govt. imposed fine for not having healthcare. ($700 a year or something). I believe many will do the same as I and that will make this whole “lets cover everyone” program backfire on the govt. in a big way! Wait and see, it will become a nightmare for the govt.
I suppose I’m one of those in the minority who actually have a benefits package. Of course, this biases me against taxation on my benefits.
Though the example given has sound reasoning behind it, the fact is that I’m being taxed on money that I never see–on income that I do not make. More to the point, I’m being taxed on benefits that I don’t even get 100% value from.
I happen to be in a job that has blessed me with something that people would call a “Cadillac” package. Due to my lower actual wage, however, the taxation on my benefits would tax me as though I were making an additional 24% income (based on 40% taxation of total aggregate value of my benefits). This 40%, for me, amounts to roughly $13k per annum. Right now, I don’t use anywhere *near* $13k worth of medical services, and, as I’m in my early 30s, probably won’t reach those levels for another decade or two, provided nothing unfortunate happens. In this case, the logic of the example from the article fails. I wouldn’t be paying as much as I would be taxed on, which is why I don’t see this as particularly fair.
So, admitting my bias–and we’re all biased–I’m opposed to this tax, and view it as taxation without representation. Were I to actually have an opportunity to vote for this measure, I would vote against it. Likewise, I did not vote for either of the candidates that supported this measure.
But such is life in a republic. You win some, you lose some, so I guess my only real option is to grin and bear it.
A few other things I thought to add:
–Life in general is not fair. As Americans we are blessed well beyond most of the world’s population, even in our poverty; we really don’t have a whole lot of room to complain about very much (I still whine all the time anyway)
–If we’re going to talk about selective fairness and relate it to the example of the two people making $50k, I suggest it would be just as fair–and certainly preferable– to aim for the flip side of that example, wherein efforts are taken to defray the costs of the person without benefits, rather than penalizing the person who has them (granted, I admit this may be impractical at present)
–Despite life not being fair in general, I believe the fairness we can achieve needn’t require those who are more prosperous (at least for legal reasons) to suffer punitive actions that–in all likelihood–aren’t helping the less privileged anyway (such as in the aforementioned example)
–Having worked for both Federal and State government agencies, I’ve watched what happens when tax revenues dried up: for my state, at least, the solution was not to raise taxes, but to cut spending. Unfortunately, that did result in job loss, but my state’s economy is currently among the best in the nation. I think it’s possible that this might also work on a Federal level
–I see taxation of benefits as principally similar to the “No Child Left Behind” law, which, at least indirectly, risked penalizing students who excelled, as teachers felt the need to spend more time on students who did not in an effort to ensure they (the teachers) kept their jobs
–This idea might look fair in print, but it really seems to ignore what may be better alternatives (I’m sorry I don’t have any specifics to offer at the moment), and I really don’t feel that it addresses any of the roots of the problems
I’ll shut up now. 🙂
Whatever is the contract between my employer and me is our business, not the government’s. I’m sick of the govt. sticking it’s nose into everything we do. And I don’t like the idea of taxing the health care benefits because I believe the govt. should be reducing our taxes not increasing them. They misuse much of the tax money we send them already. They are insanely profligate. As the TEA partiers say: we’re Taxed Enough Already. Let’s close down the nosey IRS and go to a Consumption Tax.
Only 20 per cent? Teachers, police,fire department, federal and state employees and don’t forget the ones who keep this nation safe (our military) and the list goes on. I do not know the exact figures but to state that this tax would not hurt a large portion of the citizens would be a huge understatement. like many other people I made my decision to work for a company that offers a good healthcare plan over higher wages because I wanted the security that I would be able to provide my family with health care when necessary. I made this decision 23 years ago and now you want to change the rules. My company contributes about 14,000 per year to healthcare regardless of the amount of dependents an employee has. I don’t have the option of changing contribution from my employer and I’ve never used over $5000 per year of coverage, but you want to tax me on $14,000. GET REAL. The ones that are pushing the cart are getting tired of the ones that keep jumping in the cart for a free ride. I have no problem paying my fair share, but if they keep taking from me maybe I’ll just have to jump on the cart and help contribute in our county falling further in dept. The ones voting themselves a free paycheck are about to find out that the ones funding the account are about to go broke. What Will they do if the check bounces and they cannot receive their freebies?
Calling them “benefits” is confusing. The “benefits” are paid out by the insurance company when I receive health care. When I first read that “benefits” might be taxed, I was alarmed. Taxing the “premiums” paid by my employer, which is what is meant, is not as bad, esp. for those of us requiring a lot of health care.
Thanks for your comment, Pavelina. I understand the confusion. However, most HR folks and employers consider premiums paid on your behalf as benefits.
Here’s the problem with your answer to question number 2, you assume that healthcare benefits are a “perk”. That’s not always true. Many times, they are a negotiated part of an overall compensation package. So, to someone who negotiated a better insurance plan by taking less salary (which happens more often than not) now you’re asking them to pay more tax or choose a worse benefit plan to offset the increased taxes. I wouldn’t call that fair. I would not necessarily be opposed to taxing benefits on new employees, those who could go into a job understanding what they’re getting into, but to tax plans already in place is not fair at all.