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Your Take: Ending Employer Health Care Tax Deductions

It’s the new year and, given the results of the fiscal cliff negotiations, I thought this item from NPR’s six policies economists love but people hate [3] was worth discussing. Here’s the item:

End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

The story goes that many years ago, when wages were fixed, employers started offering health benefits to their employees as a way to increase compensation without increasing actual pay. You pay a little but the employer pays much more but gets a deduction against revenue. The argument in favor of this policy is that it’s important for people to know what they’re getting (which was partially addressed in the health care reform law and now benefits are listed on your paystub, though you don’t pay taxes on it) and that you start avoiding “Cadillac” coverage simply because businesses can write off the cost.

I agree with the first reason – it’s important that people understand what they are getting. I don’t think eliminating the deduction achieves this unless you start making people pay for it themselves. No one likes that.

As for the second, a business offers health insurance because it wants to. The deduction is nice and for corporations it’s a big deduction, corporate tax rates are pretty high, but it’s a matter of what management wants to do with the money. Pay it to shareholders or pay it to employees? If you want to take care of employees to the point of offering them healthcare, then you do it. If you’d rather pay shareholders (which is not any less noble), then do that.

During the fiscal cliff negotiations, there was talk that health care benefits should be taxed. Since it’s considered compensation to the employee, why not tax it? I think that actually achieves the first reason (educating the employee on what they’re getting) without having them take the full brunt of the cost of health care. It might educate people on just how expensive it is and how they might want to take advantage of the preventative services.

What do you think?

(Photo: italintheheart [4])