Health insurance is a major beneficiary of federal tax breaks that help taxpayers with high incomes, tax experts said today on Capitol Hill.

The experts appeared at a tax benefits and burdens distribution hearing organized by the Senate Finance Committee. The committee held the hearing to look into reports that lower-income taxpayers often pay a higher tax rate than higher-income taxpayers pay.

Scott Hodge, president of the Tax Foundation, Washington, said the group health insurance tax exclusion is a prime example of a tax break that helps higher-income taxpayer more than lower-paid taxpayers and may disrupt the market.

The group health tax exclusion will cost the U.S. government about $174 billion this year, and it “creates a classic third-party payer problem in which patient-consumers are disconnected from the cost of service,” Hodge testified at the hearing, according to a written version of his remarks posted on the committee website. “The cost of health care is soaring because we have an unlimited demand for health care since someone else is paying the bills. The market forces that deliver quality goods at low prices for everything from toasters to automobiles have been disrupted in the health care system because it is tax preferred.”

The Patient Protection and Affordable Care Act of 2010 (PPACA) will make matters worse, not better, Hodge said.

David Shaviro, a law professor at New York University, also said the group health tax exclusion tends to help higher-income taxpayers more than lower-income taxpayers but is somewhat less useful to the taxpayers at the top of the income distribution.

“There are means available by which Congress could, if it chose, reduce the regressivity of tax expenditures up to the 99th percentile without repealing them altogether,” Shaviro said. “For example, it could reduce the $1.1 million cap on home mortgage loan principal that generates deductible expense, and/or (as proposed in the President’s budget) convert the deduction into a percentage credit at a fixed rate that is lower than the top marginal rate. Likewise, it could cap the value of employer-provided health insurance that is excludable from income, and/or require its inclusion with the offsetting allowance of a fixed-rate credit.”

Implementing those ideas could increase economic efficiency, reduce the budget deficit, and reduce disproportionate benefit high-income taxpayers get from these items, Shaviro said.

Other tax policy coverage from National Underwriter Life & Health: