Revenues
Function 550 - Health
Reduce Tax Subsidies for Employment-Based Health Benefits
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
Billions of dollars | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2025– | 2025– | |
Limit the income and payroll tax exclusion for employment-based health insurance to the 50th percentile of premiums | |||||||||||||
Change in mandatory outlays | 0 | 0 | 0 | 1 | 2 | 3 | 4 | 2 | 4 | 4 | 3 | 20 | |
Change in revenuesa | 0 | 0 | 0 | 82 | 120 | 131 | 144 | 156 | 169 | 183 | 202 | 985 | |
Decrease (-) in the deficit | 0 | 0 | 0 | -81 | -118 | -128 | -140 | -154 | -165 | -179 | -199 | -965 | |
Limit the income and payroll tax exclusion for employment-based health insurance to the 75th percentile of premiums | |||||||||||||
Change in mandatory outlays | 0 | 0 | 0 | * | 1 | 2 | 2 | 2 | 3 | 3 | 1 | 13 | |
Change in revenuesa | 0 | 0 | 0 | 42 | 63 | 70 | 77 | 85 | 94 | 103 | 105 | 534 | |
Decrease (-) in the deficit | 0 | 0 | 0 | -42 | -62 | -68 | -75 | -83 | -91 | -100 | -104 | -521 | |
Limit only the income tax exclusion for employment-based health insurance to the 50th percentile of premiums | |||||||||||||
Change in mandatory outlays | 0 | 0 | 0 | ** | 1 | 2 | 2 | 1 | 3 | 3 | 1 | 12 | |
Change in revenuesa | 0 | 0 | 0 | 59 | 86 | 94 | 103 | 112 | 123 | 132 | 145 | 709 | |
Decrease (-) in the deficit | 0 | 0 | 0 | -59 | -85 | -92 | -101 | -111 | -120 | -129 | -144 | -697 | |
Data sources: Staff of the Joint Committee on Taxation; Congressional Budget Office.
This option would take effect in January 2028.
* = between zero and $500 million; ** = between -$500 million and zero.
a. Estimates include the effects on Social Security payroll tax receipts, which are classified as off-budget.
The federal government provides tax subsidies for health insurance purchased through an employer by excluding employers' payments for their employees' health insurance premiums from income and payroll taxes. As a result, tax revenues are less than they would otherwise be. For about 90 percent of workers enrolled in employment-based coverage, the amount they pay for health insurance premiums is also excluded from income and payroll taxes. The federal tax system also excludes certain contributions made to various health spending accounts that employees can use to pay for eligible out-of-pocket health care costs, such as flexible spending arrangements, health reimbursement arrangements, and health savings accounts.
This option consists of three alternatives that would limit the extent to which employers' and employees' contributions for health benefits could be excluded from taxation. Under the first alternative, the total amount of contributions for a worker's premiums and health spending accounts in 2028 that exceeded $10,000 for individual coverage or $24,400 for family coverage would be subject to both income and payroll taxes. Those limits would be based on the 50th percentile of employment-based health insurance premiums in 2026. (A percentile's value indicates the percentage of observations that fall below it.) To set the tax exclusion limits in 2028 and later years, those 2026 premium percentiles would be indexed for inflation using the chained consumer price index for all urban consumers (chained CPI-U), one measure of overall price inflation. Under the second alternative, the limits would be based on the 75th percentile of premiums in 2026 and similarly indexed for inflation, resulting in limits of $12,700 per year for individual coverage and $31,300 per year for family coverage in 2028. Under the third alternative, contributions for health benefits that exceeded the same limits used in the first alternative (based on the 50th percentile of premiums) would be subject to income taxes but still excluded from payroll taxes.
All three alternatives would reduce federal deficits by increasing tax revenues, because some workers would enroll in lower-premium plans (which would increase their taxable income) and others would remain enrolled in higher-premium plans and pay taxes on the portion that remained above the threshold. To a lesser extent, revenues would also increase because fewer workers would enroll in employment-based coverage. Revenue increases would be partially offset by higher federal outlays for workers and their families who newly enrolled in the health insurance marketplaces established by the Affordable Care Act, Medicaid, or the Children's Health Insurance Program.