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Are Health Insurance Premiums Really a Tax?

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Are Health Insurance Premiums Really a Tax?

January 13, 2020

When presidential candidate Elizabeth Warren released her plan for a single-payer health-care system, she claimed that it would require “not one penny in middle-class tax increases.”  Warren argued that health insurance premiums for staff are already like a tax on employment, so instead of “companies sending those payments to private insurance companies,” they could “send payments to the federal government for Medicare in the form of an Employer Medicare Contribution.”

For employers, who buy 89 percent of privately funded health insurance in the United States, it’s easy to see how paying for health insurance might feel like a tax. It’s an expense whose nature is stipulated by the federal government, for which employers may be penalized if they don’t buy it for their staff.

But the employer mandate is very loose, as the Affordable Care Act sought to avoid greatly increasing the cost of employment during a recession. It requires businesses to cover only 60 percent of medical costs, lets them charge workers premiums up to 9.5 percent of their income, and entirely exempts companies with fewer than 50 employees. As a result, the 57 percent share of companies offering health-care benefits in 2019 is the same as it was before Obamacare’s mandate went into effect in 2014.

Far from employer-sponsored health insurance being a tax on hiring, its prevalence reflects the fact that it actually reduces the income tax wedge faced by businesses when seeking to attract staff.  By compensating staff with health-insurance benefits, it is possible to avoid combined state and federal taxes of up to 50 percent. The more expensive health insurance gets, the more people value a job that provides them.

Under Warren’s Medicare for All proposals, by contrast, paying for health-care benefits would drive up the cost of compensating workers, because the policy would involve an actual tax increase, rather than an effective tax cut. It’s hard to imagine that workers wouldn’t notice the loss of a partial tax exemption in the financing of their own compensation, combined with its replacement by a big tax hike to pay for the expansion of health coverage to others.

It is true that compensation provided as healthcare benefits reduces the amount that would have been provided as wages. This may feel like a tax to workers, who usually have little say over which health plan was purchased for them or how much they pay for it. But the solution to this problem is to give individuals more control over the health-care funds that their employers spend on their behalf—not, as Senator Warren advocates, to take away choice altogether.

Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

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