The Tax Deduction That Costs $180 Billion A Year

Morning Edition's series, the Twelve Days of Tax Deductions, zeroes in on some of the tax breaks lawmakers are grappling with as they hammer out a budget deal, to raise revenue, cut spending and avoid the end-of-year "fiscal cliff." On Day 11, we look at the deduction for employer sponsored health insurance.

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DAVID GREENE, HOST:

OK, so here in Washington we have this battle ongoing over the budget with the deficit deadline looming. And part of what's on the table is a debate over taxes, and we've been learning about individual tax deductions and credits in our 12 Days of Deductions.

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GREENE: Today, no, not 11 pipers piping, but the biggest deduction of them all. It costs the government a whopping $180 billion a year. Ready for it? It is the deduction for the employer-sponsored health insurance.

MARTIN SULLIVAN: Most people don't realize they're getting a huge tax benefit when their employer pays for their health care and that that payment is not subject to tax.

GREENE: That's Martin Sullivan. He's an economist with the publication "Tax Analyst." He says 60 percent of Americans under the age of 65 benefit from this.

SULLIVAN: This really got its start in World War II when wage and price controls took effect. Employers were not allowed to raise wages that they could increase employees' health insurance, so they did and then the IRS went along with that by giving them an exemption for those payments.

So here's the key. Without this deduction, the health insurance that employees receive would be considered taxable income, and thus we'd be paying more in taxes. Sullivan says some lawmakers would like to limit this deduction or even get rid of it altogether in order to level the playing field with individuals who buy their own health insurance.

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GREENE: Tomorrow, we will dig into a grab bag of overlooked deductions - from gambling losses, to baggage fees, to even champagne.

That's the business news on MORNING EDITION from NPR News. I'm David Greene.

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