The House Ways and Means Committee held a hearing Thursday on proposals to limit tax breaks for employers who provide health care for employees.
“Let’s consider the largest health tax expenditure, for employer-sponsored health insurance plans, commonly referred to as the employer exclusion,” said committee chairman Kevin Brady, R-Texas “Congress incorporated this highly popular tax break into the tax code decades ago so that employers could attract and keep workers during a time of wage freezes. At the time this provision was created, the labor market and the health insurance market both looked very different.”
More than 150 million Americans under the age of 65 now receive their health insurance through their employer, he noted. However, Brady questioned whether the employer exclusion might have some negative economic impact.
“The employer exclusion is a contributing factor in our country’s stagnant wage growth,” he said. “That’s because the tax code incentivizes putting a greater share of compensation toward nontaxable health plans and less to taxable paychecks. So, as health care costs rise, employers divert increases in compensation to health care at the expense of take-home pay.”
Brady contended that the tax break limits the number of choices available to employees who might want to shop for a health care plan that might better fit their needs, and the tax break may also contribute to higher costs.
“Evidence suggests that the employer exclusion leads to higher health care costs for all Americans,” he said. “Oftentimes, someone who participates in an employer-sponsored health plan does not face the actual—and increasingly expensive—cost of care. This encourages beneficiaries to consume more health services, including services they may not even need, driving up overall costs.”
Joseph Antos, a scholar with the American Enterprise Institute, testified about problems with the employer exclusion. “Experts from across the ideological spectrum have long recognized the structural flaws of the tax exclusion as it is currently configured,” he said. “The exclusion can be restructured to promote better insurance choices that lead to more efficient, higher value care … [capping the exclusion, for example,] represents a shift toward a more equitable system that could be implemented without disrupting the way most people purchase health insurance.”
Avik Roy, a senior fellow at another conservative think tank, the Manhattan Institute, testified, “The present tax treatment of health care is the central flaw in our health care system.”
Rep. Adrian Smith, R-Neb., said that on his first job, he believes he could have paid less for his health insurance coverage than the plan offered by his first employer. “I certainly see policies today that discourage consumerism, and certainly discourage—well, prohibit—people from exercising what I would call freedom to decide what is the best coverage that would be there for their families or themselves as individuals.”
However, the employer exclusion also had its defenders on the committee, including the ranking Democrat, Rep. Sander Levin, D-Mich., who called the Republican proposal another in a long series of attempts to undermine the Affordable Care Act’s expansion of health care coverage.
“This would disrupt the employer-based health insurance system that 155 million working Americans and their families rely on for coverage, and likely result in many employers no longer offering health coverage to employees,” said Levin. “And it would leave many, including employees who are older or in poor health, without the ability to find affordable coverage.”
The National Retail Federation, a trade group representing retailers, asked the House Ways and Means Committee to reject proposals to cap the exclusion of employer-provided health benefits from federal income tax. “Favorable tax treatment today supports health coverage for more than 175 million working Americans and their dependents,” NRF vice president for health care policy Neil Trautwein said in a statement. “Capping the exclusion—even at a high level—opens the door to widespread disruption of this coverage. It is not a wise direction for policymakers to consider.”
