H E A L T H W A T C H Easing the Stigma of Public Coverage: Workers with Health Coverage at Their Jobs Get Significant Government Aid Too September 2019 IN TRODUC TION the role of ESI.3 Today, the employer tax Reaching the Five Percent: A Profile of Western exclusion is the U.S.’s largest tax expenditure PETER NEWELL by far, estimated to reach $287 billion this Director, Health Insurance and Central New Yorkers Without Health Coverage1 provided a detailed analysis of the year.4 Project, United Hospital Fund uninsured in western and central New York, Employees and employers benefit from the United Hospital Fund is finding that tens of thousands of people were exclusion and related tax rules in many ways. an independent, nonprofit eligible for public programs like Medicaid, First, the premiums paid by employers for organization working to build a more effective health care the Essential Plan or Child Health Plus, or workers’ health coverage are not treated system for every New Yorker. tax credits to make coverage more affordable. as wages and so are not subject to either In discussion groups conducted as part of federal or state income tax, and employers Anthony Shih, MD, MPH the research, about 40 residents candidly President discussed barriers to coverage, including affordability (particularly for those earning Tax Exclusions and Tax Expenditures Chad Shearer between 200% and 400% of the federal The ESI tax exclusion is one example of many Senior Vice President poverty level); the perceived value of ways that the federal government “spends” for Policy and Program coverage, given the high out-of-pocket costs money by excluding certain resources in many products; and the difficulty of or funds from normal taxation under the navigating the health care system without Internal Revenue Code. This spending is United Hospital Fund 1411 Broadway, 12th Floor some help. But many participants also cited accounted for and tabulated annually by New York, NY 10018 another barrier—the stigma associated with (212) 494-0700 the U.S. Department of Treasury and is enrolling in public programs or accepting www.uhfnyc.org known as a “tax expenditure.” As opposed financial help. This issue brief seeks to cast the decision to accept financial help to direct spending, which is triggered by an This work was supported for coverage in a new light by examining a appropriation by Congress, tax expenditures by a grant from the Health Foundation for Western & large and often overlooked federal and state are defined as revenue losses attributable Central New York. subsidy for coverage: the tax exclusion for to provisions of the federal tax law, which employer-sponsored insurance (ESI; see allow a special exclusion, exemption, or box at right). deduction from gross income—or which provide a special credit, a preferential rate of BACKGR OUN D tax, or a deferral of tax liability. For additional More than 156 million American have information on health care tax exclusions, coverage through their employers, including see: over 9.6 million New Yorkers—about half Urban Institute & Brookings Institution. of the state’s residents.2 The reason for “How does the tax exclusion for employer- the primacy of ESI in the U.S. health care sponsored health coverage work?” and system, unique among developed countries, “What are tax expenditures and how are they is a well-worn tale; during a World War II- structured?” Tax Policy Center Briefing Book: era wage freeze, employers tried to attract Key Elements of the U.S. Tax System. and retain employees by compensating them in another way—buying them group Rae M, Claxton G, Panchal N, and Levitt L. health coverage. Decisions by the IRS and October 27, 2014. Tax Subsidies for Private Congress to give this type of compensation Health Insurance. Henry J. Kaiser Family preferential tax treatment helped cement Foundation. H E A L T H W A T C H can deduct the payments as a business in New York State and how it compares to expense. Second, the ESI contributions are other federal support and subsidies for health not subject to the 15.3% Federal Insurance care. Contributions Act (FICA) payroll tax on The estimated federal tax expenditure for wages that supports Medicare and Social New York’s share of the ESI tax exclusion Security and is split equally between is about $17.5 billion. This far exceeds employers and employees. Finally, employees direct federal spending on Affordable Care who contribute to the cost of their ESI Act premium tax credits, the Child Health typically make the payments pre-tax, before Plus program, and the Essential Plan, and their income and FICA taxes are assessed. amounts to nearly half of federal expenditures for Medicaid and Medicare in New York. THE ESI TAX EXCLUSION Since federal tax code provisions “flow AND NEW YORK through” to state income tax codes, unless explicitly “de-coupled,” the full value of the The ESI tax exclusion provides a significant ESI exclusion exceeds $22.65 billion when subsidy for New Yorkers with coverage New York’s estimated $5.151 billion tax through their jobs. Figure 1 presents an expenditure is figured in.5 estimate of the size of the federal ESI subsidy Figure 1. Selected Federal Health Care Tax Expenditures and Direct Spending in New York ACA Premium Tax Credits $635 million Child Health Plus $1.75 billion Essential Plan $4.9 billion ESI Tax Exclusion $17.5 billion Medicaid $38.05 billion Medicare $39.9 billion Source and notes: See appendix. $5,658 page 2 $4,373 $4,181 $4,296 H E A L T H W A T C H ES I TAX EXCL USI O N B E N E FI T S FO R did not exist. Therefore, Employee D’s IN DIV IDUALS IN N E W Y O R K taxable income includes $50,000 in wages To show how the ESI tax benefits flow to and the whole amount of the employer’s typical individuals, taxes were calculated $6,163 contribution for health insurance. for four fictitious employees with similar Because of the preferential tax treatment for circumstances. All four employees have no ESI, Employee B saves about $2,000 on taxes ACA Premium Tax Credits $635 million dependents to declare, are not subject to annually compared to Employee A—about state or federal adjustments, and take the $170 a month—paying lower federal and Child Health Plus standard deduction on state $1.75 federal ACA Premium Tax Credits and billion $635 million state income and FICA payroll taxes. It’s a taxes. As shown in Figure 2, Employee different story for Employee D, whose taxes Essential Plan A receives compensation of $50,000billion $4.9 were calculated without the favorable ESI Child Health Plus $1.75 billion (all in wages), and Employee B receives provisions. Compared to Employee C, the ESI Tax Exclusion compensation of $50,000 (wages of billion $17.5 billion burden for Employee D increases overall tax Essential Plan $4.9 $43,837 and an employer ESI contribution of $6,163 by over $2,500 annually, because the annually). Employees C and D receive total Medicaid employer contribution toward ESI is included $38.05 billion ESI Tax Exclusion $17.5 billion compensation of $56,163 ($50,000 in wages in income and the employee cannot make and an employer contribution for health Medicare the annual employee contribution toward $39.9 billion Medicaid coverage of $6,163). In order to demonstrate ESI of $1,578 on a pre-tax$38.05 billion basis. Employee the value of the federal ESI tax exclusion C also enjoys a modestly lower tax bite than Medicare another way, the hypothetical tax calculation $39.9 billion Employee A, even though they receive the for Employer D was made as if the exclusion same wages. Figure 2. How the ESI Exclusion Affects the Tax Bill for Individuals $5,658 $4,373 $4,181 $4,296 $3,825 $3,704 $3,433 $3,233 $5,658 $2,737 $4,373 $2,348 $2,246 $1,857 $4,181 $4,296 $3,825 $3,704 $3,433 $3,233 $2,737 $2,348 $2,246 $1,857 Employee A A Employee Employee B B Employee Employee C C Employee Employee D D Employee Compensation: $50,000 Compensation: $50,000 Compensation: $56,163 Compensation: $56,163 $50,000 in wages $43,837 in wages $50,000 in wages $50,000 in wages No ESI contribution US Tax $6,163 ESI contribution FICA $6,163 Taxcontribution NY ESI $6,163 ESI contribution Employee A Employee B Employee C Employee D (without ESI tax exclusion) U.S. Tax FICA NY Tax Source and notes for Figure 2: See appendix. $8,943 $8,312 $7,650 $7,267 $8,943 $8,312 $6,050 $7,650 $7,267 $5,199 $4,742 $3,899 $6,050 $4,136 $3,708 $5,199 $4,742 page 3 $2,575 $2,228 $4,136 $3,899 ACA Premium Tax Credits $635 million H E A L T H W A T C H Child Health Plus $1.75 billion Essential Plan $4.9 billion ESI Tax Exclusion $17.5 billion Medicaid $38.05 billion ES I TAX EXCL USI O N B E N E FI T S FO R did not exist. Therefore, Family D’s taxable FAMILIES IN N E W Y O R K income includes $100,000 in wages plus the Medicare $39.9 billion whole amount of the employer’s $16,898 A similar dynamic plays out for families, as shown in Figure 3. In this example, taxes contribution for health insurance. were calculated for four fictitious families Even though they have the same overall of four, all married filing jointly, using the level of compensation—$100,000—Family standard deductions, and eligible for the B enjoys a savings of about $5,400 annually federal child credit and state child deduction compared to Family A (about $455 a month) and credit. Current tax rules were applied because of the ESI preferential treatment, to Family A (with income of $100,000, all in as federal and state income taxes and FICA $5,658 wages) and Family B (also with an income of are all reduced. And without these favorable $100,000, including $83,102 in wages and $4,373 ESI tax provisions, Family D (with the exact $4,296 $4,181 $3,825 an employer ESI contribution). same benefit package as Family C) would $16,898 from Tax Credits $3,704 ACA Premium $3,455 $3,240 $635 million Families C and D both received total pay about $7,300 more in taxes annually $2,737 $2,348 compensation of $116,898 ($100,000 in compared to Family C. To put it another $2,246 Child Health Plus $1.75 billion $1,863 way, federal and state subsidies for ESI save wages and $16,898 from their employer’s contribution to health insurance). As in Family C over $7,300 annually—enough Essential Plan $4.9 billion Figure 2, in order to demonstrate the value for a Buffalo resident to pay 12 months of of the federal ESI tax exclusion for families premiums for a gold-level individual plan Employee A Employee B Employee C Employee D another way,Tax Exclusion ESI the tax calculation for Family D $17.5 billion York’s marketplace in 2019. from New was made as if the federal ESI tax exclusion FICA NY Tax US Tax Medicaid $38.05 billion Medicare $39.9 billion Figure 3. How the ESI Exclusion Affects the Tax Bill for Families $8,943 $8,312 $7,650 $7,267 $6,050 $5,199 $4,742 $3,899 $4,136 $3,708 $2,575 $5,658 $2,228 $4,373 $4,181 $4,296 $3,825 $3,704 $3,433 $3,233 $2,737 $2,348 $2,246 $1,857 Family A Family A Family B Family B FamilyFamily C C Family D Family D Compensation: $100,000 Compensation: $100,000 Compensation: $116,898 Compensation: $116,898 $100,000 in wages $83,102 in wages Tax US FICA $100,000 in wages NY Tax $100,000 in wages No ESI contribution $16,898 ESI contribution $16,898 ESI contribution $16,898 ESI contribution Employee A Employee B Employee C (without ESID exclusion) Employee tax U.S. Tax FICA NY Tax Source and notes for Figure 3: See appendix. $8,943 $8,312 page 4 $7,650 H E A L T H W A T C H CON C LUS ION Regardless of the policy outcome, increasing Although the ESI tax exclusion is largely awareness about the ESI tax exclusion— hidden, it has generated considerable debate its size and its beneficiaries—should help for decades. The exclusion regularly turns change some attitudes. First, for uninsured up on lists of actions the U.S. could take to New Yorkers, who were raised to be self- reduce the federal deficit. Critics argue that 6 reliant and might be ashamed to accept help, the exclusion encourages excessive health the knowledge that fellow New Yorkers with spending, is regressive7 (since higher-income ESI—the “haves” of the health care system— individuals receive a disproportionate share are reaping the benefit of nearly $23 billion of the benefits), and that the money could in tax subsidies annually should ease any be better spent providing coverage for the stigma associated with enrolling in public uninsured. Others have coverage or applying for challenged the notion advanced premium tax that the exclusion is As one observer noted, the “huge credits. And second, regressive, noted the tax subsidy is so hidden, [it allows] as one observer noted, importance of the prosperous employed workers the “huge tax subsidy exclusion (despite its to believe that other people— is so hidden, [it allows] flaws) to the large group certainly not we ourselves—are prosperous employed pooling mechanism, and workers to believe that warned of disrupting ESI beneficiaries of the American other people—certainly coverage for vulnerable social welfare state.” 10 not we ourselves—are families by getting rid of beneficiaries of the or capping the exclusion.8 American social welfare Most recently, the possible repeal of the state.”10 Once aware of the benefits they Affordable Care Act’s “Cadillac tax” on high- receive—let’s call it the paystub test—New cost employer plans has put the exclusion in Yorkers with ESI may think twice about 9 the news. Were the nation to adopt a single- criticizing public spending for the uninsured, payer system, of course, the tax exclusion for or casting aspersions on those who do accept ESI would be a thing of the past. financial help for coverage. AC K N OWLEDGME N T S This project was supported by a grant from the Health Foundation for Western & Central New York. The Health Foundation is an independent private foundation that advocates for continuous improvement in health and health care by investing in the people and organizations that serve young children and older adults. Arkay’s Consulting Services, Inc. reviewed UHF’s tax calculations for the examples provided. page 5 H E A L T H W A T C H AP P E NDIX : M E T H O D O L O G Y Figure 1 Sources for the totals in Figure 1 are as follows: For ACA premium tax credits, the NYSOH enrollment report for 2019 (https://info.nystateofhealth.ny.gov/2019openenrollmentreport) For Child Health Plus and the Essential Plan, the FY2019-2020 Aid to Localities budget bill (S1503-D/A2003-D, Department of Health) For ESI tax exclusion, the total federal expenditure ($287 billion) multiplied by New York’s pro rata share of all employer- sponsored coverage using Henry J. Kaiser Foundation Kaiser State Health Facts, Health Insurance Coverage of the Total Population. (https://www.kff.org/other/state-indicator/total-population/?currentTimeframe=0&sortModel=%7B%22colId%22 :%22Location%22,%22sort%22:%22asc%22%7D) For Medicaid, Report on the State FY 2018-19 Enacted Budget Financial Plan and Capital Program and Financing Plan, New York State Office of the Comptroller (https://www.osc.state.ny.us/reports/budget/2018/2018-19-enacted-budget-financial-plan-july.pdf) For Medicare (2014), Henry J. Kaiser Family Foundation, State Health Facts, Medicare Spending, Total Medicare Spending by State (https://www.kff.org/medicare/state-indicator/medicare-spending-by-residence/?currentTimeframe=0&sortModel=%7 B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D) An alternative estimate of New York’s share of the total federal ESI exclusion expenditure (multiplying the total number of New Yorkers with ESI by CBO’s average per capita expenditure of $1,810) produces a similar estimate of $17.26 billion. Both estimates are probably conservative since New York’s average single premium for private employers exceeds the U.S. average by $1,062 and for family premiums, by $2,338; premiums for public employees are likely higher, because the collective bargaining process generally results in lower-cost sharing and premium contributions for employees and higher premium contributions for employers. Figures 2 and 3 A 2014 publication, Tax Subsidies for Private Health Insurance (https://www.kff.org/private-insurance/issue-brief/tax-subsidies- for-private-health-insurance/) served as a useful guide for constructing the hypothetical tax returns for individual and families used as examples in Figures 2 and 3. Regular 2018 tax forms and instructions for form 1040 for federal and IT-201 for state returns were used to calculate these returns. In order to simplify the exercise, the hypothetical taxpayers reported only wages (and no interest, dividend, or other income); used standard deductions, rather than itemizing; had no applicable state or federal modifications; and did not live in New York municipalities where personal income taxes are levied. In recent years, about 30% of taxpayers nationally, mostly high-income filers, itemized deductions on their returns. (Urban Institute and Brookings Institution. Tax Policy Center Briefing Book: Key Elements of the U.S. Tax System. What are itemized deductions and who claims them? https://www.taxpolicycenter.org/briefing-book/what-are-itemized-deductions-and-who-claims-them) That percentage is expected to decrease because of Tax Cut and Jobs Act limitations on itemized deductions, and higher standard deductions. Families in our examples also filed using the standard federal child tax credit and New York child deduction, and, for those eligible, the Empire State Child Tax Credit. For individuals and families with health insurance, the average New York single and family premiums and employee contributions from an annual federal survey were used. (Tables II.C.1.and 2 and II.D.1. and 2. from the Agency for Healthcare Research and Quality, Center for Financing, Access and Cost Trends. 2018 Medical Expenditure Panel Survey-Insurance Component. https://meps.ahrq.gov/mepsweb/data_stats/quick_tables_results.jsp?component=2&subcompone nt=2&year=2018&tableSeries=-1&tableSubSeries=&searchText=&searchMethod=1&Action=Search) An assumption was made that Employees B and C and Families B and C worked for firms that maintain IRS Code section 125 cafeteria plans that allow employees to take pre-tax deductions for their contributions toward coverage, thus reducing their taxable income. According to a 2012 survey, 41% of small firms (3-199 workers) and 91% of larger firms offered employees this option. (Kaiser Family Foundation and Health Research Education Trust. Employer Health Benefits 2012. https://www.kff.org/ wp-content/uploads/2013/04/8345.pdf) For Employee D and Family D, an assumption was made that these employees could not make pre-tax contributions toward coverage, and ESI contributions were not excluded from income—so federal, state, and FICA taxes were calculated as if these contributions were taxable income. Other health-related tax benefits available to employees and individuals were not discussed in this issue brief. Both employees and individuals may have access to Health Savings Accounts. In addition, self-employed individuals can deduct health insurance premiums, and individuals with coverage can deduct personal medical expenses (except prescription drugs) exceeding 10% of adjusted gross income. Nationally, U.S. tax expenditures for these three categories totaled $18.67 billion in 2018, a fraction of the tax exclusion for ESI. (U.S. Department of the Treasury, Office of Tax Analysis. Tax Expenditure. October 19, 2018. https://home.treasury.gov/system/files/131/Tax-Expenditures-FY2020.pdf) page 6 H E A L T H W A T C H E N DN OT E S 1 Newell P. April 2019. Reaching the Five Percent: A Profile of Western and Central New Yorkers Without Health Coverage. United Hospital Fund and Health Foundation for Western & Central New York. https://uhfnyc.org/publications/publication/uninsured-in-western-and-central-ny/ 2 Henry J. Kaiser Family Foundation. State Health Facts. Health Insurance Coverage on the Total Population. https://www.kff. org/other/state-indicator/total-population/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort% 22:%22asc%22%7D 3 For background, see Carroll AE. September 5, 2017. The real reason the U.S. has employer-sponsored health insurance. The New York Times. https://www.nytimes.com/2017/09/05/upshot/the-real-reason-the-us-has-employer-sponsored-health- insurance.html; and Bartlett B. July 30, 2013. The question of taxing employer-provided health insurance. The New York Times. https://economix.blogs.nytimes.com/2013/07/30/the-question-of-taxing-employer-provided-health-insurance/?_php=true&_ type=blogs&_r=0 4 Congress of the United States Congressional Budget Office. April 2019. Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2019 to 2029. https://www.cbo.gov/publication/55085 5 New York State Division of the Budget and New York State Department of Taxation and Finance. FY 2019 Annual Report on New York State Tax Expenditures, Appendix C. https://www.budget.ny.gov/pubs/archive/fy19/exec/fy19ter/taxexpendfy19.pdf 6 Congress of the United States Congressional Budget Office. December 2018. Options for Reducing the Deficit: 2019 to 2028. https://www.cbo.gov/publication/54667 7 Antos J. December 6, 2016. End the exemption for employer-provided care. he New York Times. https://www.nytimes.com/roomfordebate/2015/04/14/the-worst-tax-breaks/end-the-exemption-for-employer-provided- health-care; and Van De Water PN. Limiting the Tax Exclusion for Employer-Sponsored Insurance Can Help Pay for Health Reform. June 2009. Center on Budget and Policy Priorities. https://www.cbpp.org/research/limiting-the-tax-exclusion-for-employer-sponsored-insurance-can-help-pay-for-health-reform 8 White J. August 2017. The Tax Exclusion for Employer-Sponsored Insurance Is Not Regressive–But What Is It? Duke University Press. Journal of Health Politics, Policy and Law. 2017 42(4)697-708. https://read.dukeupress.edu/jhppl/article- abstract/42/4/697/130392/The-Tax-Exclusion-for-Employer-Sponsored-Insurance?redirectedFrom=fulltext; Schoen C, Stremikis K, Collins S, and Davis K. May 2009. Progressive or Regressive? A Second Look at the Tax Exemption for Employer-Sponsored Health Insurance Premiums. The Commonwealth Fund. https://www.commonwealthfund.org/sites/ default/files/documents/___media_files_publications_issue_brief_2009_may_progressive_or_regressive_a_second_look_ at_the_tax_exemption_pdf_1269_schoen_progressive_or_regressive_esi.pdf; and Gruber J. June 2011. The Tax Exclusion for Employer-Sponsored Health Insurance. National Tax Journal, 64 (2, Part 2), 511- 530. https://www.ntanet.org/NTJ/64/2/ntj-v64n02p511-30-tax-exclusion-for-employer.pdf 9 Goodnough A. July 17, 2019. House votes to repeal Obamacare Tax once seen as key to health law. The New York Times. https://www.nytimes.com/2019/07/17/us/politics/obamacare-democrats-cadillac-tax.html 10 Pollack H. March 29, 2017. Is the tax exclusion for employer-sponsored insurance regressive? The Incidental Economist Blog. https://theincidentaleconomist.com/wordpress/is-the-tax-exclusion-for-employer-sponsored-insurance-regressive/ page 7