Capping the Tax Exclusion of Employer-Sponsored Health Insurance: Is Equity Feasible?

Research Report

Capping the Tax Exclusion of Employer-Sponsored Health Insurance: Is Equity Feasible?

June 2, 2009

Abstract

Some policymakers propose capping the amount of employer-sponsored insurance that is exempt from federal income and payroll taxes. If such a cap is based on employer premiums, inequities will result. Workers could pay higher taxes if their employer is located in a high-cost area, if many co-workers are in their 50s and 60s, or if a few employees have a major illness or accident. To avoid such inequities, the cap could be based on benefit generosity, measured by actuarial value, which is the cost of expected claims if a nationally representative population received the covered benefits.

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