Have you ever wondered what you would do if it were your job to balance the federal budget? Raise tax rates on the rich? Cut discretionary and administrative spending? Alas, budget experts across the political spectrum agree that such measures, while overwhelmingly popular, will fail to slim our nation’s fiscal deficit considerably. Consequently, most schemes in Congress instead feature unpopular moves like hiking middle class taxes or gutting Social Security and Medicare. But what if there were another way?
A single provision of law might provide the answer, a loophole known as the exclusion from taxable income for employer-sponsored health insurance. By far the largest one on the books, this tax exclusion subsidizes corporate health insurance expenses heavily, a benefit denied to ordinary Americans purchasing their own care. While both Democrats and Republicans, including President Obama and President Bush, have sought this loophole’s restraint or repeal, powerful special interests have blocked meaningful reform for decades. When the American people say the system is stacked against them, this is what they mean.
We know the greatest driver affecting spending is ballooning healthcare inflation, suffocating Medicare and Medicaid. The Congressional Budget Office projects that by 2038 this outlay alone will devour 46 cents of every tax dollar. We also know just how terribly loopholes can ravage our revenues, with the CBO revealing that deductions, exclusions, and credits cost the country $1.4 trillion last year. That is more money than the entire $1.1 trillion raised by the personal income tax. The employer health insurance loophole has the dubious honor of exacerbating both our spending and tax troubles, and we are long overdue to plug it. Let us lay out why:
First, the exclusion fosters healthcare inflation by incentivizing businesses to swap traditional employee wages with excessive medical insurance. Since health spending is subsidized while worker pay is not, businesses flatter their workers with unnecessary health programs even while cutting salaries. This massive overconsumption inflames healthcare costs, explaining the extraordinary eruption in medical prices during the last three decades. Surging healthcare inflation in turn breaks the budgets of ordinary Americans struggling to afford medical treatment, and breaks the budgets of governments struggling to finance Medicare and Medicaid.
Second, the loophole is a costly and opaque giveaway to corporate America. Some of these expenses are direct: the loophole costs the government $300 billion per year in lost tax revenue, a whopping 44% of the entire 2013 federal budget deficit. Other expenses are indirect: bestowing corporations with a healthcare price advantage over everyday Americans results in employer provision of most private insurance, furnishing bosses with the power to make important medical decisions for their workers. Today in America we have corporations refusing to allow contraception or abortion services even when their employees want them, or vice versa, docking salaries to pay for such coverage even when it offends a worker’s religion and values.
Proponents of the employer health insurance exclusion often argue that healthcare should be subsidized because of its importance to the community. But subsidized for whom? The loophole is no ordinary subsidy, but a highly regressive one. It embraces the privileged with Cadillac medical plans and shuns the poor with little to no insurance. Ironically, programs such as Medicaid and CHIP, which subsidize healthcare for those who actually need help like single moms and impoverished children, are nearly bankrupt because of the rampant medical inflation triggered by this loophole.
Our democracy’s inherent vice is that special interests can often push for special privileges at the expense of the public good. But our democracy’s inherent virtue is that when everyday people are truly determined, no outside group can restrain us. Our job is to fight for America with the same vigor that the entrenched fight for themselves.