NCPA - National Center for Policy Analysis

Health Insurance and Taxes

July 10, 2002

Federal and state governments already spend over $100 billion annually in subsidies by excluding employer spending on health insurance from taxable employee wages. Would new subsidies reduce the number of 40 million non-elderly uninsured?

According to Jonathan Gruber:

  • The primary reason employees are uninsured is that they are not offered insurance in the workplace, with small and low-wage firms in particular unlikely to offer insurance.
  • Tax policies can affect insurance status in various ways, and small firms' decisions to offer health insurance are fairly sensitive to the tax subsidization of insurance prices.
  • The level of insurance spending at firms that do offer it is also sensitive to subsidies, partly reflecting a shifting of costs to employees as employer spending is less subsidized.

The findings suggest that removing or reducing the existing tax subsidy to employer-provided health insurance could lead to significant increases in the number of uninsured.

  • Completely removing the subsidy would cause 22 million workers to lose employer-provided insurance coverage.
  • Likewise, subsidizing small and low-wage employers could significantly increase insurance coverage.
  • On the other hand, claims Gruber, worker decisions to take-up insurance do not appear to be price sensitive, and therefore subsidies to employees to spend on insurance premiums are unlikely to be an effective route.

Subsidies to non-group insurance purchase would allow significant numbers of uninsured to purchase insurance, says Gruber, but would potentially erode the group market. And given the high costs of insurance in the non-group market, subsidies there might be a very costly means of reducing the number of uninsured.

Source: Based on Jonathan Gruber, "Taxes and Health Insurance," NBER Digest, April 2002; NBER Working Paper No. 8657, December 2001, National Bureau of Economic Research.

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