DAVID GREENE, HOST:
The largest tax break out there is one of the least talked about. That might be about to change. As part of our look into the debate over the federal budget and tax policy, NPR's Julie Rovner introduces us to the tax exclusion for employer-provided health insurance.
JULIE ROVNER, BYLINE: Most people don't even realize that they don't pay taxes on the value of the health insurance they get from their employer. That's too bad, says MIT health economist Jonathan Gruber, because it represents a whole lot of money. Just what would happen if all those health benefits were treated the same as wages for federal tax purposes?
JONATHAN GRUBER: We would raise about $250 billion per year more.
ROVNER: Or, he says, to put it another way...
GRUBER: If we ended the tax exclusion, we could cover every uninsured American with health insurance twice over.
ROVNER: That makes the health insurance tax break bigger than the home mortgage deduction, bigger than the charitable deduction and bigger than the deduction for capital gains, or state and local taxes. There's another thing about the health care exclusion that's kind of surprising. It happened largely by accident. Tom Leibfried is a legislative representative with the AFL-CIO.
TOM LEIBFRIED: Economists uniformly agree that we have employer-based coverage in this country. Two-thirds of everyone who has health insurance has it through an employer, and that's because this tax benefit has existed since World War II.
ROVNER: More specifically, says economist Gruber, it happened because employees started giving their workers health insurance because wage and price controls during World War II prevented them from giving cash wage raises.
GRUBER: And it's sort of grown exponentially since, and there really isn't a single health care expert who would design a system from scratch which would include this feature.
ROVNER: One big reason economists from across the ideological spectrum don't like the insurance tax exclusion much is that it's regressive. That means those it helps the most are the richest people with the most generous health plans, says Ron Pollack of the consumer group Families USA.
RON POLLACK: So if you're uninsured, you get nothing. If you're a low-wage worker, you get a very little tax break. If you get a lousy health care plan, you get a very little break out of this.
ROVNER: And giving people a tax break encourages them to take their compensation in the form of health benefits rather than wages, says Gruber. In other words, it's a discount on health insurance, which he says leads to other bad things, like health care inflation.
GRUBER: People are buying health insurance with 60-cent dollars. And as a result, they're buying too much of it. They're buying too much health insurance, and that leads to too much health care consumption.
ROVNER: So why hasn't the exclusion been taken away long since? One large and obvious reason is that it would be seen by those who benefit from it as a tax increase, and those are not only rich people, says the AFL-CIO's Leibfried.
LEIBFRIED: A large amount of this money would come right out of the pockets of working families. The Ways and Means Committee staff looked at where the tax benefit goes for this tax break. Eighty-one percent of it goes to families making less than $200,000 a year.
ROVNER: But the biggest concern - particularly in light of the implementation of the Affordable Care Act - is that taking away the tax break would prompt employers to stop offering coverage. And that would push more people to new health care exchanges that will just be starting to find their footing, says Jim Klein. He heads the American Benefits Council, which represents large employers.
JIM KLEIN: This is a very delicate moment in the history of our health care system. And to now, in addition to all the other changes, to make changes to the tax treatment of employer-provided health care, would seem to be very risky.
ROVNER: The federal health law actually does begin to make some changes to the tax treatment of health insurance. It imposes a so-called Cadillac tax on very generous health plans starting in the year 2018. Many people think that given the money involved, however, that tax could be expanded and sped up as part of the current negotiations. Julie Rovner, NPR News, Washington.
GREENE: And on ALL THINGS CONSIDERED later today, the politics of taking on the health care tax break.