NCPA - National Center for Policy Analysis


November 24, 2009

Many Americans never think about the fact that health insurance premiums are now tax-free by law, says the Associated Press (AP).  Employers don't pay taxes on what they contribute, nor do workers pay taxes on their portion of premiums.  And self-employed workers can take a deduction for their premiums.

Tax-exempt health insurance is an accident of history, says the AP:

  • During World War II, the government froze wages, so employers lured workers with health benefits. Employers' contributions were made tax exempt.
  • Congress later made sure the tax exemption became law.

The system has led to "Cadillac" health plans with bloated benefits for some, including coverage for "in vitro fertilization, marriage counseling and acupuncture," says economist John C. Goodman, President, CEO and the Kellye Wright Fellow of the National Center for Policy Analysis. 

According to Goodman:

  • Taxing wealthy Americans to pay for health care -- as the House bill would do -- is bad for the economy because it would take money out of the system that could be used to invest in growing businesses.
  • A better alternative would be to give everyone the same lump sum tax credit for core health insurance, as John McCain proposed when he was running for president, and let people use their taxed income to buy more insurance if they chose.

"The big mistake that Obama made in all of this is not explaining that we have a big mess on our hands and we ought to solve it in a way that, as much as possible, treats everybody the same," explains Goodman.

Source: Carla K. Johnson, "Health reform: Is tax on 'Cadillac' plans fair?" Associated Press, November 24, 2009.


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