Currently, employer contributions to health insurance premiums (as well as most employee contributions) are excluded without limit from workers’ taxable income. Over the last several years, policymakers have proposed various ways to limit the tax benefits workers and their families receive when they purchase health insurance through their workplace. The Illustrative Individual Tax Reform Plan set forth by the National Commission on Fiscal Responsibility and Reform in its 2010 report is the newest iteration of a proposed tax on workplace health benefits. Among other methods of reducing the federal budget deficit, the “Bowles-Simpson commission” suggests first capping the tax exclusion for employer-sponsored health insurance and then phasing it out entirely. The cap would be set at the 75th percentile of premium levels in 2014 (i.e. initially affecting the 25% of workers with more expensive employer-sponsored health plans), frozen in nominal terms through 2018, and then phased out by 2038.

This paper examines the percentage of workers in single and family plans who would be affected by the cap in its initial year and through 2018. It analyzes the dollars that could be taxed under the proposed plan and the populations most likely affected. The paper also discusses whether reducing the value of the tax exclusion cap would make employers less willing to provide health insurance and the extent to which costs would shift onto workers and their families. Lastly, the paper cautions against expectations that taxing benefits would significantly contain overall health sector costs—both in regards to how much money is actually saved as well as who bears the burden of this cost-savings.