A bar chart showing that federal group health subsidy spending, and Medicaid and Medicare spending, are likely to rise faster than federal individual health subsidy spending (Credit: Congressional Budget Office)

Analysts at the Congressional Budget Office (CBO) have published an analysis that could keep employers’ group health benefits tax exclusion in budget cutters’ dreams, and nightmares, for years to come.

The CBO is now predicting that exempting group health premiums from employers’ taxable income will cost the federal government about $516 billion in tax revenue in the 2030 federal fiscal year, up from $303 billion for the 2021 federal fiscal year.

 

That means that the cost of the group health tax break could increase by 67%, or by about $200 billion per year.

Resources

  • A copy of the new CBO analysis of federal health coverage subsidies is available here.
  • An article about an earlier CBO health subsidy analysis is available here.

The federal fiscal year runs from Oct. 1 through Sept. 30. Federal fiscal year 2021 started last Thursday.

The CBO is an arm of Congress that helps members of Congress look for ways to manage federal spending.

The Deficit Is Still There, and Bigger

Some members of Congress may have tried to close their eyes and think of kittens and puppies when getting CBO briefings in the past few months, but they may soon have to open their eyes and pay attention.

The U.S. federal government reported a loss of $1 trillion for fiscal year 2019, on $3.5 trillion in revenue and $21 trillion in “gross domestic product” (GDP), or national income, compared with a loss of $779 billion for fiscal year 2018 on $4.1 trillion in revenue.

The CBO is now estimating that the government ran up a deficit of $3.3 trillion for fiscal year 2020 on just $3.3 trillion in revenue. The CBO is is hoping that the government will report a deficit of just $1.8 trillion on $3.3 trillion in revenue for fiscal year 2021.

The federal Office of Management and Budget, which is part of the White House, publishes a list of federal “income tax expenditures,” ranked by the projected federal revenue effect, every year. The group health tax exclusion is the top tax expenditure on the list.

The exclusion of net imputed rental income ranks second, the tax rules for capital gains rank third, and the exclusion for employer contributions to defined contribution retirement plans, including 401(k) plans, ranks fourth.

Other Federal Health Coverage Subsidies

The CBO analysts also looked at the federal budget impact of other major types of coverage.

Programs for the Poor

The category of programs that help poor people includes the federal share of spending on Children’s Health Insurance Program (CHIP) coverage and Medicaid.

CHIP plans help poor and moderate-income children.

Medicaid is a program that helps poor people, and some older, middle-income people who need nursing home care.

Medicare

Medicare is a federal program that pays for care for the elderly.

The programs also serves some people with disabilities, and people who either need a kidney transplant or are getting kidney dialysis.

The new CBO analysis includes the cost of providing Medicare for people age 65. Because enrollees under 65 are either disabled or suffering from kidney failure, they tend to have high annual medical costs.

Affordable Care Act Programs

The Affordable Care Act (ACA) created premium tax credit subsidies that many people can use to pay for individual and family major medical coverage purchased through an ACA public exchange program.

The ACA also created the Basic Health Program, which, in effect, is a government-run “public option” program aimed at low-income people who earn a little too much to qualify for Medicaid or CHIP coverage.

The program gives a state the ability to create a menu of subsidized health plans designed for people who are just above the Medicaid eligibility cutoff. Eligible people can choose whether or not to sign up for and pay for the coverage. Minnesota and New York state are the two states that now offer Basic Health Program plans.

Here’s a chart that shows how the CBO analysts see the future of the total federal budget impact of group health coverage, Medicaid and CHIP, ACA-created coverage, and Medicare for people under age 65:

Total Federal Budget Impact of Tax Breaks and Actual Spending
2021 2030 Change
(tax break and spending, in billions of $)
Support for Employment-Based Coverage  $            303  $            516 +70.3%
Medicaid and CHIP  $            433  $            569 +31.4%
Nongroup Coverage and Basic Health Program  $              60  $              77 +28.3%
Medicare  $            125  $            196 +56.8%

Here’s a chart that shows how the CBO analysts see the per-person impact of those health coverage programs changing:

Federal Budget Impact of Tax Breaks and Actual Spending, per Plan Enrollee
2021 2030 Change
(tax break and spending, in $ per person)
Support for Employment-Based Coverage  $         2,000  $         3,340 +67%
Medicaid and CHIP  $         5,640  $         8,260 +46%
Nongroup Coverage and Basic Health Program  $         6,630  $         8,710 +31%
Medicare  $      15,840  $      24,180 +53%

— Read Group Health Gets the Biggest Federal Health Subsidy: CBOon ThinkAdvisor.

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