Health Care, Tax Experts Call for Federal Tax Reforms

Published August 1, 2005

Experts on health care and tax reform gathered in Washington, DC in June to release a petition calling for changes in U.S. tax policy on health insurance.

Grace-Marie Turner of The Galen Institute and Daniel Mitchell of The Heritage Foundation, coordinators of the briefing, said tax breaks for job-based health insurance artificially support increased demand for more-expensive health insurance and medical services.

The petition was signed by nearly 50 health and tax policy experts and will be used to demonstrate support in the business, academic, and public policy communities for addressing the inefficiencies in the health sector created by current tax law, said Turner.

Petition Encourages Tax Changes

The petition suggests Congress begin by “capping the amount of income that employees can shelter from taxes” by buying health insurance (which is not taxed if the employer pays the premium), allowing only a fixed dollar amount of health insurance to be tax-exempt. It suggests eventually eliminating the employee tax exclusion altogether.

The petition notes Section 106 of the Internal Revenue Code provides a generous but invisible tax preference for health insurance that employees receive through the workplace, by allowing that part of employee compensation received in the form of health insurance to be excluded from income and payroll taxes.

“This is the single largest tax preference allowed by law, and it creates distortions throughout the health sector,” the statement says. “It provides a huge incentive for employers rather than consumers to purchase health insurance and has resulted in a system that hides from workers the true cost of their health care consumption. … Further, this tax law discriminates against those who don’t get health insurance at work and contributes to growth in the ranks of the uninsured.”

Should Be Revenue-Neutral

“Employers should continue to be allowed to deduct the cost of health insurance as a legitimate business expense, but employees should not receive tax exemption for an unlimited amount of health insurance,” the petition reads.

“If it is the policy of the government to encourage people to buy health insurance, it might better be done by means of allowances targeted directly to individuals to assist them in purchasing the health coverage of their choice,” the petition concludes.

The petition supports reforming tax treatment of employment-based health insurance as part of revenue-neutral tax reform. The signers do not believe any tax reform legislation should result in an aggregate tax increase for the American public, according to the document.

Code Impedes Insurance Market

“The United States does not have a properly functioning market for health care because tax policy hides from the majority of Americans the full cost of health insurance and health care consumption,” said Turner in an invitation to sign the petition, which began circulating in March. Current U.S. policy is driving up costs and contributing to increases in the number of uninsured Americans, Turner said.

“For more than 50 years, the federal tax code has officially sanctioned and encouraged the provision of health insurance through the employer, in the process short-circuiting the vital relationship between the consumer and the provider that optimizes choices and costs,” said petition signer John Berthoud of the National Taxpayers Union.

By one estimate, according to Berthoud, between 20 and 30 percent of all health insurance spending “is wasted due to this distorted decision-making among workers and employers. Why shouldn’t individuals be put back in charge of their own health insurance decisions? Congress should immediately offer the same health insurance tax deduction for individuals that it offers to businesses, whether or not a person is self-employed.”

Berthoud also advocates consumers be permitted and encouraged to shop across state lines for health insurance. “These steps would begin to restore the competitive forces to the health insurance market that have already benefited consumers in automobile and other insurance sectors.”

Opportunity Cited

Turner and Mitchell jointly drafted the petition, titled Joint Statement on Tax and Health Reform, with input from other experts in the tax and health policy community, including Joseph R. Antos and Robert B. Helms of the American Enterprise Institute, Stephen J. Entin of the Institute for Research on the Economics of Taxation, John C. Goodman of the National Center for Policy Analysis, and Professor Mark Pauly of the Wharton School at the University of Pennsylvania.

“The coming debate over tax reform and tax simplification presents an historic opportunity to begin to fix one of the key provisions in tax law that drives many of the distortions in our health sector,” said Turner. “We provide huge subsidies through the tax code for job-based health insurance, but almost nothing for working people who don’t or can’t get health insurance at work.

“The tax debate gives us the chance to provide more rational subsidies that will help to engage consumers in forcing the health sector to provide more cost-effective, affordable health insurance and health care,” Turner said.

Susan Konig ([email protected]) is managing editor of Health Care News.

For more information …

The petition can be read online at