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Tax Subsidies for Private Health Insurance

The federal and state tax systems provide significant financial benefits for people with private health insurance. The largest group of beneficiaries is people who enroll in coverage through their jobs. There also are tax benefits for people who are self-employed and for people with high medical costs.   Recently, the Affordable Care Act (ACA) provided for new premium tax credits to assist low and moderate income families purchasing coverage directly from insurers (nongroup coverage).

The value of these tax benefits is substantial. The largest tax subsidy for private health insurance — the exclusion from income and payroll taxes of employer and employee contributions for employer-sponsored insurance (ESI) – was estimated to cost approximately $250 billion in lost federal tax revenue in 2013.1 The new premium tax credits under the ACA were estimated by the Congressional Budget Office (CBO) to cost $45 billion in 2014, and increase to $146 billion in 2017, as more individuals enrolled in subsidized coverage.2 In addition, the federal tax deduction for health expenses (including premiums) exceeding 10% of the adjusted gross income is estimated to cost $12.4 billion in lost tax revenue in 2014.3

Despite the important role that the tax system plays in subsiding private coverage, the amount of the benefit received by individuals and families is often not well understood because the tax code is complex, and the value that families receive from tax exclusions and other tax subsidies can vary substantially with income and individual circumstances. Another complicating factor is that the largest tax incentive for private insurance — the exclusion of the cost of ESI — is an indirect subsidy that is never actually reported to the individuals and families who benefit from it. Many people with employer coverage are probably not aware that the federal and state tax exclusions for private health insurance provides them with a subsidy worth several thousands of dollars a year.

In this brief we describe the different forms of tax assistance for private health insurance and provide examples of how they work and how the amounts may differ by income and type of coverage. The examples focus on taxes for 2012, the latest year for which the tax simulation model we used provides complete estimates.4 The model estimates a household’s state and federal taxes based on relevant details, including income and deduction. Tax credits available for non-group coverage were estimated using the Kaiser Family Foundation subsidy calculator.5

I. Federal and State Tax Exclusions for ESI