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CBO: What if we shrink the group health tax break?

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Killing the federal group health tax break could cut the percentage of Americans with employment-based health coverage in half. But capping the exclusion at the median premium would simply lead to a modest reduction in the percentage of people with incomes over 200 percent of the federal poverty level (FPL) who have coverage.

Allison Percy, an analyst at the Congressional Budget Office (CBO), makes those predictions in a slide deck she prepared for a presentation she delivered at the American Society of Health Economists.

Federal budget officials have been complaining about the effects of the group health tax exclusion for years. In 2008, for example, Bush administration budget officials noted that the exclusion was costing the U.S. Treasury about $168 billion in lost income tax and employer withholding tax revenue.

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Last year, CBO officials were estimating the group health tax exclusion is costing the country about $250 billion per year in lost tax revenue — and will continue to do so, even after a Patient Protection and Affordable Care Act (PPACA) excise tax on high-cost plans, or “Cadillac plan tax,” takes effect in 2018.

In the new slide deck, Percy looks only at the possible effects of group health tax break changes on the number of U.S. residents with employment-based health coverage between now and 2017.

Percy presents conclusions from three separate analyses showing that eliminating both the income and payroll tax exclusion could reduce the percentage of nonelderly U.S. residents with employment-based coverage anywhere from 6 percentage points to 26 percentage points.

Percy also presents the results of new CBO analyses of several options, including completely eliminating the tax exclusion and capping the tax exclusion at the median premium.

  • If the country keeps the exclusion rules as is, the percentage of people with employment-based health benefits could be 27 percent for people with incomes under 200 percent of the FPL and 85 percent for people with incomes over 400 percent of the FPL.
  • If the country eliminates the exclusion, the percentage of people with employment-based health benefits falls to 12 percent for low-income people to 50 percent for high-income people.
  • If the country caps the exclusion at the median premium, 27 percent of the low-income people might still have coverage, and the percentage of high-income people with coverage might fall just a bit, to 83 percent.


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